Pity the London stock market: it just cannot get a break. For eight years, starting pretty much exactly the day after Britain voted to leave the European Union, it has been by some margin the worst performing major bourse in the world. All this time bullish City traders have pointed to how much cheaper British shares appear to be relative to those listed elsewhere, insisting that a rally is imminent. Earlier this year, with the prospect of a stable Labour government bringing an end to Tory chaos, many hoped that this moment of redemption had finally arrived.
But one poorly received budget, a weaker than expected domestic economy and the election of Donald Trump have put paid to that. Last week UK shares hit their lowest level since April, which means that the FTSE100 has risen just 5 per cent this year and 10 percent over the last five years. That compares to a rise of 24 per cent this year in the S&P 500, which tracks the 500 largest companies listed in the US, and 90 percent over five years. For all the talk of Germany’s broken economic model, even the Dax40 index of leading German shares is up 14 percent this year and 46 percent over the past five.
Of course, the reality, as I explained in an essay for Prospect in June, is that it is Britain’s economic model that is broken—and the dire performance of the stock market is a reflection of that. The City was central to the modern renaissance of Britain’s economy, but through a combination of carelessness and complacency that advantage was squandered, exposing a domestic economy weakened by decades of underinvestment. Now the demise of the stock market itself poses a potent risk to the wider economy, making it more expensive for UK firms to raise capital and endangering an entire ecosystem in the City that has historically paid a lot of tax.
No wonder, then, that the government is prepared to contemplate desperate measures to boost the stock market. Last week, Rachel Reeves used her Mansion House speech to set out sensible reforms encouraging consolidation of the pension sector with the creation of Australian and Canadian-style “megafunds” that have the scale and capacity to invest in a wider range of assets, including infrastructure and start-ups. But on Monday, Emma Reynolds, the pensions minister, went further. In an interview with the Financial Times, she said that the government does not rule out forcing pension schemes to invest a set portion of their funds in British shares.
It is hard to overstate how ill-advised this would be. True, there is no shortage of siren voices in the City whispering in the Treasury’s ear that this is what it should do. They argue that since pension savings attract generous tax advantages, the government is entitled to have some say over how these savings are deployed. They also argue that Britain is an outlier among major economies when it comes to the extent to which savers shun domestic shares. Only 4.4 percent of UK pensions are held in domestic equities, compared to a 10.1 percent global average. How can we convince foreign investors to put money into British companies if we don’t back them ourselves?
But set against this are the huge risks of embarking down a path tantamount to the partial reintroduction of capital controls. As I noted in my essay, the origins of the extraordinary success of the modern City can be traced to the decision by the Thatcher government to abolish exchange controls in 1979. Since then, the principle that capital should be allowed to move freely to where it can achieve the best returns has been a cornerstone of the British and western financial system. Forcing British pension funds to keep investment at home would send up a giant distress flare that the UK no longer believes it can attract capital on its own merits.
Far from giving confidence to foreign investors it would be more likely to drive them away. Rather than driving share prices up, long-suffering investors who have tired of waiting for a recovery that never comes would welcome the chance to sell to forced British buyers. After all, why should they any longer trust the integrity of UK share prices if they are being artificially sustained by mandatory purchases? Britain would soon come to be seen again, as it was during the dark days of the Liz Truss debacle, as a “submerging market”.
Meanwhile, what of the risks to pension savers? Britain already faces a slow-motion pension crisis as a result of the failure by a huge swathe of the population to accumulate anything like the assets that they need to fund their retirement. Forcing pension schemes to invest in unloved British shares would not only cut across the fiduciary duties of trustees to seek out the best returns for their members, it would risk exposing fund members to lower returns. That would contribute to worse retirement outcomes, and it could put some people off saving via pensions. This is precisely the opposite of what government policy should be trying to achieve.
The truth is that there are no easy answers to the deep funk in which the stock market finds itself. But this kind of crude economic nationalism, effectively a half-baked seventies-style welfare scheme for investment bankers paid out of the savings of the hard-pressed middle classes, is the very worst answer of all.
