Britain turns its back on shares

published 31 October 2005

Forget rising oil prices and worries about unsustainable levels of corporate profits. Instead, according to Bill Jamieson in The Scotsman, by far the most serious issue facing the FTSE is the "gathering institutional exodus" from the market as life insurers and pension funds reduce their equity exposure. It is this process that is most likely to mark the end of a long-term upward trend in UK stocks. In the 1950s, pension funds and insurers gradually began to bolster their exposure to equities, and their "colossal buying power" continued to buoy the market throughout the 1980s and 1990s. But now, the "cult of equity is unravelling". Last year, the share of the UK market owned by life assurers slid to a 29-year low of 17.3% as stringent new solvency rules and rising liabilities forced them to ditch shares for bonds or property. Pension funds' market share, meanwhile, had halved to 16% from a 1992 record by December 2003. And the selling isn't over: according to a survey by the Investment Management Association, institutions are set to ditch up to £150bn of shares by 2007.

This retreat is largely inevitable. It makes sense for institutions to diversify into increasingly important overseas markets, such as Asia. Moreover, institutions became overexposed to equities in the 1980s. Had they diversified earlier, the UK might have avoided the crisis in pension funding and continual cuts in life-policy bonuses. But regardless of why it has come about, this state of affairs now means the market is increasingly dependent on foreign buyers and individual investors - hardly reliable sources of support. Overseas interest depends on the pound staying reasonably buoyant, so if "investors take fright at the UK's huge trade and budget deficits", a sharp sell-off could ensue. And thanks to endowment policy failures and the Government's attack on the tax benefits of Isas, retail investors now (probably wrongly) deem property a better long-term bet than equities.

The Government hasn't just frightened off individuals, says Anthony Hilton in the Evening Standard. Talented executives have become increasingly reluctant to work at listed companies, while the number of listed firms has slid sharply in the past few years. The fact is that interest in stocks has dwindled because "Britain is becoming a less attractive place to grow a business". Numerous studies show that Britain's competitive position has deteriorated under Labour, while there has been virtually no profit growth since 1997. Both the market's price and p/e ratio are at 1997 levels. Chalk this up to the prevailing anti-business culture, from the harangues of ministers against profits to the tax burden on small businesses. Thanks to the Government, Britain has "fallen out of love with shares".