Investment Comment
26th January 2024
The dearth of equities: a shrinking market
From an investor’s perspective, equities have proved to be a good long-term investment, albeit with risk, meaning that investors should anticipate periods of losses. If history is a guide then investors should continue to expect equities to provide long-term returns. Our own estimate for future returns is around 6% per annum, which is above inflation, but lower than has been achieved historically as valuations remain high (especially in the US) and trend growth in profits (outside of the US) has been falling over the past decade. However, equities are still likely to deliver higher returns than other listed asset classes over time and remain a fundamental part of the investment solution set for most long-term investors.
A smaller pool of equities
The number of companies listed on most equity markets has fallen in recent decades. While this is a global trend, parochial commentators point to the fall in companies listed in the UK and state that the London Stock Exchange is in ‘secular decline’: Resuscitating the London Stock Exchange | Oxford Law Blogs. Over 4,000 companies were listed on the UK main market in the early 1960s, falling to 2,700 in 1996 and less than 1,100 as at the end of 2022 and so it is easy to be downbeat about the fate of the equity market in the UK.
However, the fall in the number of companies on quoted stock markets has fallen around the world. The main reason for the decline has been the steady stream of companies delisting, mainly because they have been bought (i.e. when Halifax Bank of Scotland (HBOS) was bought by Lloyds Bank the former company’s listing ended in 2009) or when a company delists due to shareholder choice or regulatory action (i.e. Marconi was delisted in 2003 through actions of the regulator when the company failed to comply to listing rules) but thankfully these are relatively few in number.
As well as more companies leaving the market, there have been fewer companies listing on equity markets in recent years. The number of companies listing in the UK has gone from an average of 150 in the late 1980s, up to 200 around the tech bubble in 1999-2000, and over the past few years around 50 companies a year have listed. Again, this pattern can be seen elsewhere. In the US, over 300 companies a year, on average, joined the stock market between 1980 and 1999. Since then, there have been only 129 a year. In the UK, the number of new listings dropped after the financial crisis and has failed to pick up meaningfully since.
China stands out as a market that continues to see new listings. This is odd as the performance of the Chinese equity market has been very poor, both in absolute terms and especially relative to other equity markets around the world. Indeed, we are struck that the issuance has continued even though on many levels the Chinese Government under President Xi could be considered to be unfriendly to investors given the moves against the likes of Alibaba since 2021.
According to PwC, China topped the Initial Public Offer (IPO) table in 2023. Chinese companies raised $45bn via IPOs in 2023 and replaced the US market at the top of the charts. So equity issuance lives, just with Chinese characteristics.
UK equity a domestic lesson of delivery
For equity investors, the past few years have been dominated by US technology stocks. The Magnificent Seven stocks (Meta, Apple, Microsoft, Alphabet, Tesla, Nvidia and Amazon) have outperformed significantly and been the driver of US stocks, outperforming the rest of the global equity market. However, chasing this narrow band of stocks may result in quite concentrated portfolios and risk in the future. Some investors may want to give up on UK equities altogether given lacklustre returns over the past decade and the shrinking universe of stocks as companies delist. We disagree.
Despite the shrinking pool of equity opportunities not all is doom and gloom for investors seeking equity investments in the UK. As clients of Artorius know, we run a direct equity strategy called Capital Discipline Process (CDP). This involves unearthing companies that are disciplined with their capital allocation, i.e. ensuring they are shareholder friendly.
Over time the strategy has performed well. While past performance is not a guarantee of future returns, the data does tell a story. And we can find other active managers that have performed well in the past that would support the idea that looking beyond the index to find better opportunities can work.
In our end of year review (post-mortem and lessons learnt) that we conduct internally as investment professionals to ensure that we continue to try and get better, we were struck that the UK CDP strategy has performed robustly against the UK market over many years, but even when compared to the wider global equity market (excluding the US).
So despite fewer stocks being listed, there are still companies that are growing and have delivered favourable returns for investors, so it’s not all doom and gloom in the UK market for investors seeking to diversify away from the high flying technology stocks of the US.
It is possible to own UK stocks that have outpaced the rest of the world (excluding the US)
Source: Artorius, Bloomberg
Please note that the above performance reflects a portfolio based on the basket of stocks that have been generated using the process indicated above. The actual client portfolio may not track the optimised solution due to client and portfolio specific reasons. Returns may increase or decrease as a result of currency fluctuation. Performance is shown gross of Artorius’ fees; other charges may be applicable depending upon individual custody arrangements and the type of assets held and traded. CPD may not be accessible to clients with smaller portfolios and/or inside some product wrappers. The value of investments can go down as well as up. Past performance is not a reliable indicator of future results. Your capital is at risk.
Salting the tea
News broke in the US that a researcher has found that salt should be added to tea. US scientist recommends adding salt to make perfect cup of tea - BBC News. Given that the American War of Independence started with tea boxes being thrown in the sea in 1773, it isn’t the first time that tea has been salted by our long-lost colonial cousins.
Gerard Lane Chief Investment Officer
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All expressions of opinion reflect the judgment of Artorius at 26th January 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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