The hidden equities crisis killing the UK economy
The real reasons our economy is screwed
Andrew Craig wrote probably our favourite ever British book on personal finance (How To Own The World), and did one of our best ever episodes - Here’s How Anyone Can Get Rich.
Andrew argues that successive regimes, regulators, politicians, treasury and so on have created the vast economic problems we face in the UK - and they don’t even understand what’s causing it.
Honestly, some of the stuff Andrew said was pretty difficult to hear. Let’s dive in.
Income in the UK versus other developed countries
Look at the income per capita in the UK - how much the average person earns a year.
30 years ago we were at roughly the same income per capita as other developed countries.
In the meantime, those other countries have cracked on whilst we’ve been static. And if you take the wealthiest people out of the UK, most people in the UK have actually gone backwards.
Why does Singapore have a GDP per capita of $120k/year, but 30 years ago it was roughly the same as ours (we’re around $45k/year ish)?
America is now at $80k ish a year. Australia is $68k ish. Everyone else has powered on except us.
Ireland’s GDP per capita is over $100k - why? They’ve had much better economic policy over the last 40 years.
We’ve destroyed our stock market
In 2007 there were 3,250 companies listed on the UK stock exchange, but now it’s less than 1,800.
The destruction of our stock market isn’t just a problem for the elites in the city. This is huge for ordinary people but we don’t even know it, says Andrew.
The smaller end of the London stock market is where you build companies worth £100m - £1b. And this area of the stock market is vital because these companies are responsible for 60% of UK employment and 50% of UK turnover.
Smaller public companies are vital for the real economy. This chunk of businesses should be the engine room of our economy. Instead we’ve decimated this area of our public markets.
There are more holders of crypto in the UK than holders of stocks and shares ISAs. £15b has gone into crypto from the UK. That’s a lot of ‘risk capital’ that hasn’t gone into young, ambitious UK companies looking to provide value in the real world.
What social good does the stock market provide? Well, it’s giving capital to companies trying to solve problems and improve our lives. This is why we need a better stock market (amongst other reasons).
Look at Nvidia. 10,000 employees at Nvidia are now worth more than $20m each. If Britain had one company like Nvidia, imagine what it would do - because of what it would also encourage in our public markets (backing companies like it) which in turn creates more employment and growth and wealth.
Andrew says our equity culture started changing under Blair. Successive regimes put draconian rules in place on how pensions funds could allocate capital, which meant £1.5 trillion has left UK listed stocks and instead went into bonds or abroad.
Yes, £1.5 trillion has left the UK stock market - and this has had enormous knock on effects on our economy, jobs, earnings, wealth, the cost of living crisis etc.
The role of pension funds
If you look at the leading economies in the world, you’ll see that about half their pensions funds’ investments are in their domestic stock market.
For instance, only 2.5% of British pension assets are in British shares, compared to more than 50% 30 years ago.
Compare that to Australia today, where although it represents 1.5% of the global stock market - 40% of their pensions funds are in Australian equities.
The UK stock market is worth about 4% of the global stock market now (there are about 70 stock exchanges), having come down from 10% 30 years ago.
Damo made the argument that it’s a good thing that our pension funds haven’t been invested n British stocks because our stock market has been an under performer for decades. But Andrew argues it’s a chicken and egg problem. The lack of investment in UK stocks has led to their under performance because they’re trading at 50p on the pound, so it’s so much more expensive for them (and way more difficult) to raise capital, so UK companies can’t compete.
This means companies elsewhere can run rings around them, which has driven the low performance.
This is evidenced by the number of British companies that get acquired from abroad, like Cadburys being acquired by Kraft - because they’re half price.British companies have struggled because our capital depth has gone. We’ve exported our nations wealth, £1.5 trillion! - and driven a switch out of equities.
Politicians seem to have lost sight of 200 years of evidence about the power of stock markets. Instead we’ve grown accustomed to this ridiculous idea that shares are really risky.
It’s a cross party calamity - it’s happened under Labour and the Tories.
The decimation of our pension industry and stock market has led to plunging wealth as an economy - and this hasn’t even been an electoral or press issue.
Good entrepreneurs are heading abroad.
ARM holdings is the biggest UK company created in the last 30 years - and it’s listed in New York.
13 of 14 British biotech companies that have floated since 2018 have done so outside the UK.
If you’re the CEO of a British company, and you’re trading at 40% - 60% discount to American stocks, you need to at least consider listing abroad. The CEOs of the UK's biggest companies like Shell or HSBC or Rio Tinto will be having discussions like this.
We had 37 consecutive months of outflows from UK equities. This is killing the UK economy.
Andrew isn’t talking about the lack of venture capital in the UK. VC is early stage and we’re relatively good at that part. It’s the funding levels beyond VC, particularly small cap (public) companies that is missing. It’s talking them from £200m up to £3b plus.
We need to turn this super tanker around.
Why he’s keen on biotech
He says the last century was about chemistry, tech and physics, but he thinks BioTech will be the driver of progress in the next century.
BioTech means using living things to create products or services, e.g. insulin was originally taken from pigs to treat diabetes.
He believes in BioTech for inherent structural reasons. We build wealth by solving problems - delivering on wants and needs. All the major remaining challenges we face as a species are about biological systems, he says - like disease and reversing environmental degradation (can we re-wild the Amazon?)
We’re now bumping up to the limits of physics, so Moore’s Law about the growth of computing power will ground to a halt. This is where biological computers can come in.
There are 10,000 issues with the human body which stem from an issue with a single gene - and we can now map genes way cheaper and quicker than ever before. Plus scientists are sharing data and evidence like never before.
How the UK can grab the biotech opportunity
We have some structural advantages because we have amazing science - Cambridge and Oxford between them have won so many Nobel prizes.
Plus having the NHS is useful because we have so much data.
Historically, we’ve done well at the science in the UK but not making businesses or money out of it.
We have the science but we don’t have the liquidity or funding to propel these kinds of companies to success in the UK. If you want to cure cancer it costs billions in investment. That’s what we need to solve, says Andrew.
If we can create a wonder drug like an oral pill which is a cure for cancer with no side effects - that could change the national dynamic - the whole economy. If we can build a household name it can become a virtuous cycle where investors then will be more likely to invest in other companies wanting to go on that journey.
There are some companies that are so good, that provide so much value, that it doesn’t really matter if they’re in a sluggish economy.
The whole Danish economy has been affected and propelled forward by Nova Nordisc for instance.
