Anthony Hilton: Stock market has stability of the graveyard

The chairman of one of our big insurance companies said the other day that he had several billion of capital he would like his firm to invest in the stock market but which, in fact, was sitting in government bonds where it was almost guaranteed to lose money.

Separately, it emerged that American and other overseas investors now own a bigger slice of the equity capital of the leading FTSE 100 companies than British pension funds do.

Third, we saw a further round of figures confirming that Britain’s productivity growth — the increase in value added per hour worked — is almost non-existent. Since the financial crash, such growth has been a tiny fraction of the number we used to take for granted. And without productivity growth there can be no lasting increase in average income per head.

The productivity figures may make things look worse than they actually are — an argument put forward by Doug McWilliams, president of the Centre of Economic and Business Research — but that is a debate for another day. Taken at face value what these three things show, each in their own way, is that Britain is in the grip of regulatory austerity. Economic activity is being stifled by regulation which puts safety before everything. The risk is that it is creating the stability of the graveyard.

There are two huge pools of capital in this country — one controlled by pension funds and the other in the hands of the insurers — and neither is doing its job. A key part of their economic purpose is to generate returns for their clients and shareholders by investing their funds in the stock market, providing the equity capital businesses need to grow and prosper, and stimulating a steady increase in the productivity and wealth of the nation. But they no longer do so — or, to the extent that they do still engage, do so on a pitifully small scale.

Too many boards feel no incentive to take risks any more. They have long had to grapple with a dysfunctional asset management industry, which is so obsessed with quarterly numbers that discourage thinking long term. But in insurance and pensions, this has been overlaid with a raft of legislative and regulatory changes designed with the good intention of making the system safe, but which have in the process made it much harder for these businesses to do what they were made to do.

If insurance company boards and pension trustees are more risk averse today than they have been in 50 years it is because that is how the system makes them — be it the regulatory straitjackets imposed by Solvency II in the insurance world, or the constant regulatory and accounting changes which act like a boa constrictor on pension schemes. Money which used to be allocated to equities now flows into allegedly safer bonds. To do anything else is either roundly discouraged, actively prohibited or made ridiculously expensive.

As a result, at a time when capital has never been so cheap, boards cannot wait to return it to their shareholders. And executives who should be rebuilding their businesses and conquering the world are to be found instead cowering in their tent.

Take away its major props and you begin to wonder what the stock market is for because it too is struggling to fulfil its economic purpose. As interest from the long-only funds wanes, there is a dwindling volume of investment research published about large companies and even less about small caps. With little to stimulate investor interest the circle of decline continues.

So many listed companies are forgotten that others no longer find it attractive to join. Thus overall numbers on the exchange are dwindling at a dramatic rate.