Why the FTSE is a market in decline

Would you buy shares in a British bank? I can see why you might in the short term. If you'd bought shares in Lloyds Banking Group back in early December last year, you'd be sitting on a nice little fortune, for example. But would you feel comfortable buying shares in a UK bank and holding them for ten years? I think the answer to that should be a clear no.

There are two main reasons. The first is the UK's insane levels of household debt now at a new record high. It might head higher still as governments wreak havoc with our economy in their increasingly desperate efforts to get elected. But in the medium term, if your customers already have significantly more of the product you provide (debt) than they actually need, can you really call yourself a growth business? Probably not.

The second is that any customers who do want to borrow or even just run a bank account have new, and often better ways to do it than via the UK's traditional fleecing machines with their pricey real estate and unreliable IT systems.

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There are new entrants to the market such as Metro Bank and Handelsbanken now the lucky holders of my own current account but of more relevance than even these are the peer-to-peer lenders. I've writtenin the past about how you canuse Zopa to lend out your own money and to borrow other people's money without bothering the commission-driven staff at your local high-street bank.

But it is also increasingly the case that small and medium-sized companies are boycotting big banks in favour of the more generous, less nitpicky peer-to-peer lending sites.

A London developer has just taken on a £4m loan from online platform LendInvest to convert office buildings into flats in Croydon. People who can't get a mortgage from a bank to get exposure to the London housing market have joined up with a developer who either can't or doesn't want to talk to a loan officer. Lloyds just isn't in the deal.

If you are in any doubt about the fact that it's all but over for conventional banks, you might also look at M-pesa, the branchless banking system that serves millions of people across Africa and of course the excitement that endlessly surrounds the digital currency, bitcoin.You can criticise bitcoin on all kinds of levels maybe it does represent a somewhat overexcited belief system, and maybe it will have been supplanted in a year or two. But it offers a secure and easily divisible way of paying for goods outside the banking system; if nothing else, its growth tells you that the current system is being seriously questioned by large numbers of clever people.

The banks are behind the curve, and governments obsess endlessly about regulating them, punishing them and breaking them up. That doesn't add up to a growth sector. It looks like a sector in slow liquidation.

It is the same for the big retailers. Why would you invest in companies that own physical shops? Every month, some quango or other shovels out another pointless report on "how to revive the high street". But it doesn't matter how much you cut business rates or pedestrianise grubby streets.

Bookshops and electronic retailers aren't ever coming back. The future high street has a few cafs, a nail bar, one boutique for the bored and a delicatessen for bits and bobs of perishable food. For everything else, we have the internet. I haven't been into a supermarket, a clothes shop or an electronics retailer in years.

Then there is the tobacco sector. I don't particularly want to invest in this anyway, for all the usual moral reasons. But even setting those aside, I wouldn't invest in it. Why would you hold shares in a sector which is used as a cash cow by investors and a political football by governments and which has to put up with a large part of its pool of customers dying every year?

Yes, the big players such as Imperial and British American Tobacco will pay you chunky dividends. But you won't make much in the way of capital gains out of big players in a shrinking market.

The same is true of integrated oil companies; I might buy these to hold for the short term, because they're a bit cheaper than they should be. But look at the sector closely and you can argue it is just another slow liquidator, paying out high dividends, because it can't put the cash to more profitable use elsewhere.

You can see where I'm going with this. Look at the UK stock market today and you'll see a high-dividend market, where a huge percentage of total returns come from dividends rather than capital appreciation.

You might think that's a good thing, and for some it doubtless is. But it is surely also symptomatic of a no-growth market. If you can't or won't reinvest your profits and companies generally are sitting on mountains of cash you pay them out. That's all well and good in the short term, but over time, the lack of investment will erode your capacity to make profit at all.

A retired fund manager friend of mine sums it up pretty well. He calls the UK "an elderly market for an elderly population". But it isn't much help if you aren't elderly. All these slowly-declining businesses are big in the FTSE 100; banks are 12%, big oil about the same, fags are 5%, retailers 4%, and so on.

If you are a long-term investor, I'd steer clear of index tracker funds chasing the FTSE 100. They might be getting wonderfully cheap themselves thanks to the pricing war taking hold in the fund management market but the declining sectors they give you so much exposure to are highly unlikely ever to make you rich.

This article was first published in the Financial Times.