Editor's letter

How negative yields could destroy the stockmarket

If the domination of negative yields continues, companies will give up on the equity markets. Why, when you are paid to borrow, would you look to the stockmarket instead?

Marks & Spencer © Marks & Spencer

It's been a bad week for Marks & Spencer. With its share price half of what it was five years ago, one of our most iconic retailers has been fairly unceremoniously chucked out of the FTSE 100 index. This is hardly a surprise. Younger generations haven't taken to its clothing lines. The food business is hideously competitive. And M&S is dealing with almost non-stop disruption in the retail environment in the UK. However, given that it was the fifth-largest firm in the index when it launched in the 1980s, the expulsion is still no small humiliation.

On the plus side, it is worth noting that M&S still makes a profit and that it pays a yield of 7% (with the dividend nearly twice covered by profits). That makes it the kind of firm you might not get much of a chance to invest in in the future. Think about the way that negative yields are transforming finance. If the domination of negative yields continues, says Seema Shah in the Financial Times this week, companies will "surely focus more on bond markets than equity markets". Why, when you are paid to borrow, would you look to the public markets instead?

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Expect then (assuming negative yields stay with us) a long-term environment in which bad companies are propped up by stupidly cheap debt and in which the usual pipeline of investable public companies slowly dries up. And instead, the only companies you will see coming to market are those that no one in their right mind would ever lend money to.

One example of that (much discussed by John and I on our weekly podcast) is WeCompany, parent of office-sharing company WeWork. It should be a simple business (buy office, rent bits out to other people, sometimes with beer), but you wouldn't know it from the 383-page prospectus. The firm is definitely growing. But it is also spending nearly $2 for every $1 it gets in revenue and as Rett Wallace of US research firm Triton points out, it offers no "narrative theory of future profitability". It does tell us that WeWork is a "community company committed to maximum global impact" and that it has a mission to "elevate the world's consciousness". But on when you might see a real profit the kind that may lead to dividends? Nothing. Don't buy WeWork when it has its initial public offering. Maybe buy a company you know can make money perhaps even UK retailer Ted Baker?

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Otherwise, if you want to cheer yourself up this week, do not read this week's politics pages (you will have to read about lousy politicians and their annoying attempts to delay Brexit forever), or personal finance (car-hire stories that will upset you). Do read City View, where Matthew Lynn explains the upside to populism and our cover story, which looks at the fascinating future of cloud computing and considers how Microsoft has transformed itself to become a leader in the field. You might feel that Brexit is as important as anything gets this week. We feel that too. But the truth is that the end of the internet as we know it, and the advent of the cloud, is likely to change our day-to-day lives an awful lot more.

PS. If you haven't already booked your seat at the MoneyWeek Wealth Summit on 22 November, visit moneyweekwealthsummit.co.uk and use the code "MWEEK20" to get 20% off. But act now tickets are limited.



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