Why has the 21st century been such a disappointing period for business and UK stock markets?
24 April 2024, 13:41 | Updated: 24 April 2024, 13:54
- David Buik is LBC's Markets Commentator and a Consultant to Aquis Exchange
Last Monday the FTSE 100 reached 8023 – a record.
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If I may be so bold, it is not one to be especially proud of. In response to this landmark, it was the FT'S Jim Pickard’s tweet on Tuesday morning “the FTSE-100 is just 16% above its 1999 dotcom-era high, while the S&P has more than trebled in value in the same period” that galvanised me to put pen-to-paper.
By any standards, that return on London’s main index seems decidedly parsimonious to me, even if one embellishes its value with the dividends, which takes the return to circa 135% over 24 years.
Perhaps there are some weak mitigating circumstances for the FTSE 100 reaching its recent dizzy height, such as the falling value of the Pound against the Dollar, remembering that 60% of FTSE 100 earnings are Dollar related, which contributes measurably to its earnings value.
There is also a school of thought that, with inflation showing some signs of 'coming back on the bridle' (11.1% in October 2022 to 3.2% last month), the Bank of England and its MPC may not necessarily sing from the same hymn sheet as the FED, when deciding to cut rates officially. Andrew Bailey and his cohorts might feel disposed to cutting rates before the FED – possibly in June, with many believing the FED could wait until August 2024.
The Bank really needs to grab the initiative and stimulate the UK’s growth prospects, which are decidedly meagre at best. The US economy is far more robust (EST: GDP 2.7% for 2024 against +0.5% for the UK). There is a limit to the amount of pain UK householders can bear on the servicing of their mortgages.
Also, business, industry and commerce desperately need to feel some alleviation of the pain inflicted on their borrowing costs. Otherwise, recession could be staring the country in the face. It will not have escaped the Bank of England that rates need to be cut, especially as there is little doubt that implementation of quantitative easing to the tune of £475 billion during the banking crisis, increased by the £400 billion spent by the Johnson government to deal with the pandemic in 2020, exacerbated the inflationary damage inflicted.
The constituent companies that comprise the FTSE 100 could not be considered a barometer of UK economic activity.
Companies have gone into and out of the FTSE like a yoyo, since 1984.
Since the turn of the century, Abbey National, Great Universal Stores, BHS, Burmah Oil (bought by BP), Debenhams, Hillsdown, ICI, SAB Miller, United Biscuits and Cadbury Schweppes are amongst a slew of companies that have left the FTSE.
They have been replaced by the likes of Vodafone, BT, and the miners such as Rio Tinto, BHP Billiton and Anglo-American. In the past couple of decades the banking sector, especially post the 2008/9 credit crisis have performed poorly. The miners have enjoyed good and disappointing periods, with telecoms tending to have been poor performers.
The late ’70s, ‘80s, ‘90s and even the early 2000s were glittering years for business, industry, and commerce in the UK and Europe. Much of the UK’S success was down to a fundamental change in the tax system, with the emphasis changing from taxing the individual’s spending power rather than his/her earning power. Income tax fell from 83% to 40% by 1986. The encouragement offered to build businesses and careers was dramatic.
At the same time, the abolition of exchange controls in 1980 and the evolution of ‘Big Bang’ in 1986 told the world at large that Britain was open for business. During this 30-year period, the UK was at its most creative and productive. Europe also flourished, as the EU grew from a membership of 9, with Sweden, Ireland and the UK joining in 1973 to a total of 28 today, and despite the UK’s withdrawing its membership in 2020. UK GDP was as follows – 1973 6.5%, 1988 5.4% and 1997 4.9%. Since those halcyon days growth in the UK and Europe has fallen away and become stagnant. Not so in the US, with China chomping at the bit, waiting in the wings.
There have been three significant issues that have dogged European economies in the past two decades – cost of energy, Covid and the 2008/9 banking crisis. Europe has yet to recover from these catastrophises. The US has done so in spades. It avoided the energy crisis by being self-sufficient. Covid did takes it toll but the US’ recovery was quicker.
Though the sub-prime crisis caused severe damage with many regional banks closing their doors for ever, a combination of TARP, the brainchild of Treasury Secretary Tim Geithner and FED Chairman Ben Bernanke and quantitative easing saw the US banking sector make a steady recovery. The same cannot be said of the UK and EU. Both economic areas have still not fully recovered.
Why did the US recover more quickly? Their culture and business philosophy made the US determined to find alternative operations to those that were trashed during the banking crisis. The likes of Apple, Amazon, Alphabet, Intel, Nvidia, Lam Research, Netflix and other tech-based operations became their new economy. Technology was embraced wholeheartedly. The wealth and job creation were gargantuan by any standards.
Conversely, there appeared to be relative apathy in Europe. Europe licked its wounds and focused far too much in shoring their respective public sector requirements, instead of encouraging the creation of new innovative and competitive businesses. Hence the stagnant economies.
As for the UK stock market; it is currently under the cosh. IPOs such as ARM were lost to New York, with Flutter likely to follow suit before too long and CVC looking to use Amsterdam to float its private equity operations. UK companies tend to be valued in London about 30% below what their valuations would be in New York. Consequently, UK companies remain in the sights of US and other overseas predators. Construction business Tyman and music group Hipgnosis backed proposals that would see them bought and removed from the UK market.
It follows a string of takeovers already this year with packaging group DS Smith, telecoms testing company Spirent Communications and haulage firm Wincanton among those falling to overseas bidders. Insurance titan, Direct Line and electrical retailer Currys have also been approached but have so far managed to fend of takeover interest.
There are those that blame Brexit for the declining mood that prevails in the City. I can only partly subscribe to that view. The government has been woeful in its inability to use Brexit to its benefit. Why no cut in Stamp Duty? Why is there a lack of incentives on taxation to encourage investment? We have great SMEs that will become huge successes.
However, with scant encouragement for innovation and a reluctance to adopt a risk appetite with tax incentives, the status quo will remain. For innovation to return, incentives must be attractive for gowth, to reverse this uncomfortable trend.
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LBC Views provides a platform for diverse opinions on current affairs and matters of public interest. The views expressed are those of the authors and do not necessarily reflect the official LBC position. To contact us email views@lbc.co.uk
