Arm’s decision to float in New York signals a sea change in the city, says HAMISH MCRAE: We must take this failure as a wake-up call
It’s very bad news for Britain that Arm chose to float in New York rather than London, but that should come as no surprise. He will get a higher valuation there.
Follow the money. But it raises the question of why the same company – the UK’s only significant competitor in the big tech world – should be worth more if launched in one city than another.
People will cite all sorts of reasons, including Financial Conduct Authority rules, with the UK still an old-fashioned place to invest and the market being tighter. But I think more than anything else, the explanation comes down to this. The two main categories of UK institutional investors – pension funds and insurance companies – do not invest in UK companies.
The most recent figures come from the Office for National Statistics (ONS) which, as I pointed out a few weeks ago, shows that UK pension funds hold only 1.8% of UK listed securities United, while insurance companies hold only 2.5%. Individuals hold 12% and mutual funds (mostly privately owned) another 7.4%. So, who owns Britain? Well, other financial institutions held 12.8%, but the lion’s share goes to foreigners: at the end of 2020, they held a record 56.3% of all listed shares.
It’s extraordinary. For starters, the statistics do not support the accusation that foreigners have stopped buying shares in UK-listed companies because of Brexit. In 2016, they held 53.9% of the UK market, so they have actually increased their holdings since then.
Building back better: A step change is coming and we must take this failure as a wake-up call if London is to take full advantage of it
This happened 25 years ago, because in 1997 the insurance companies owned 23.6%. 100 of the market. It was the top. The ONS does not detail the share 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 caused our institutions to stop investing our savers’ money in our own businesses. It’s getting worse. Not only did they stop investing new money in the UK market, they pulled their money out. Given that the bodies that once owned half the market have been relentless sellers for 20 years, it’s no surprise that the FTSE 100 is going awry.
So where did the money go? It’s complicated, but the simple answer is that regulations and tax changes have driven them to invest in gilts and other fixed-income securities, with all sorts of complex derivatives used to try to boost returns.
In this case, since the last two decades (at least until 18 months ago) have been a period of lower interest rates and low inflation, this strategy hasn’t worked out too badly for institutions. , although it has been devastating for investment in UK corporate equities – and therefore the allure of a listing on the London Stock Exchange. But that period of ultra-low interest rates is over. So look forward to it.
In the very long term, you always get higher returns on equities than on fixed income securities. The new Credit Suisse Global Investment Returns Yearbook shows that over the past 122 years in the UK equities have returned 5.3% pa in real terms, while gilts have returned 1.4%. But the last 30 years have been unusual in that fixed interest investments have done about as well as stocks.
The authors calculate that since 1990, returns on a global fixed interest portfolio have been the same as those on a global equity portfolio: 4.2%.
But when it comes to Gen Z’s outlook, they expect equities to yield a real return of 4%, while for fixed interest they expect just 1.5%. The old rule that stocks outperform gilts is back.
If they are right, and I think they are, it will have huge implications for equity investing everywhere, but particularly in London – for two reasons. The first is that it offers much better value than most other marketplaces. The other is that the depressing effect of UK institutions taking money from UK equities is over.
They can no longer withdraw money because they have no more investments. Indeed, they will now have to start rebuilding their holdings, as savers will want to know why their money is stuffed into gilts when they would get a better return on stocks.
I don’t see this change in mood happening in time to help Arm get listed in London and New York. But do not get me wrong. A radical change is coming and we must take this failure as a wake-up call if London is to take full advantage of it.