Arm decision to float in New York signals a sea change in City, says HAMISH MCRAE: We need to take this failure as a wake-up call
It is stunningly bad news for Britain that Arm chose to float in New York rather than in London, but it should come as no surprise. It will get a higher valuation there.
Follow the money. But that begs the question as to why the same company – the UK’s only significant contender in the big tech world – should be worth more if it is launched in one city rather than another.
People will trot out all sorts of reasons, including the rules of the Financial Conduct Authority, the UK remaining an unfashionable place to invest and the market being narrower. But I think more than anything else the explanation boils down to this. The two key classes of British institutional investors – pension funds and insurance companies – do not invest in British companies.
The most recent figures come from the Office for National Statistics (ONS) which, as I pointed out a couple of weeks ago, show that UK pension funds own only 1.8 per cent of UK quoted securities, while insurance companies own only 2.5 per cent. Individuals own 12 per cent and unit trusts (mostly owned by individuals) a further 7.4 per cent. So who does own Britain? Well, other financial institutions had 12.8 per cent but the lion’s share is foreigners: at the end of 2020 they held a record 56.3 per cent of all quoted shares.
This is extraordinary. For a start the statistics do not support the charge that foreigners have stopped buying shares in UK-quoted companies because of Brexit. Back in 2016, they held 53.9 per cent of the UK market, so they have actually increased their holdings since then.
Building back better: There is a sea change coming and we need to take this failure as a wake-up call if London is to take full advantage of it
What has happened goes back 25 years, for in 1997 insurance companies owned 23.6 per cent of the market. That was the peak. The ONS does not break out the proportion held by pension funds but it will be broadly similar. So since 1997, we have devised a set of rules and tax incentives that have pushed our institutions to stop investing our savers’ money in our own companies. It gets worse. Not only have they stopped investing new money in the UK market, they have pulled their money out. Since the bodies that once owned half the market have for 20 years been relentless sellers, it is unsurprising the FTSE 100 should go sideways.
So where did the money go? It is complicated but the simple answer is that regulation and tax changes have pushed them to put funds into gilts and other fixed-interest securities, with all sorts of complex derivatives used to try to bump up returns.
As it happens, since the past two decades (at least until 18 months ago) have been a period of falling interest rates and low inflation, that strategy has not worked too badly for the institutions, even if it has been a disaster for investment in the shares of British companies – and hence the attractiveness of a listing on the London Stock Exchange. But that period of ultra-low interest rates is over. So let’s look forward.
On a very long view you always get higher returns on equities than on fixed-interest securities. The new Credit Suisse Global Investment Returns Yearbook shows that over the past 122 years in the UK, equities have returned 5.3 per cent annually in real terms, whereas gilts have produced 1.4 per cent. But the past 30 years have been unusual in that fixed-interest investments have done pretty much as well as equities.
The authors calculate that since 1990, the returns on a global fixed-interest portfolio have been the same as on a global equity one: 4.2 per cent.
But looking forward at the prospects for Generation Z, they project that equities will produce a 4 per cent real return, while for fixed-interest they expect only 1.5 per cent. The old rule that equities deliver a better return than gilts is back in business.
If they are right, and I think they are, this will have huge implications for equity investment everywhere, but particularly London – for two reasons. One is that it offers much better value than most other markets. The other is that the depressing effect of UK institutions taking money out of British shares is over.
They can’t take any more money out because they don’t have any investments left. Indeed, they will now have to start rebuilding holdings, because savers will want to know why their money is stuffed into gilts when they would get a better return on equities.
I can’t see this shift in mood happening in time to help Arm get listed in London and New York. But make no mistake. There is a sea change coming and we need to take this failure as a wake-up call if London is to take full advantage of it.