Yesterday afternoon I was delighted to share my latest podcast interview, this time with the delightful Colin Campbell of CamBro Conversations. We covered just how life-changing biotech is about to be for so many of us and how exciting this is.
That having been said, we also spent a fair bit of the discussion focused on many of the reasons that the UK is so horribly challenged at the moment.
Today, I wanted to take a moment to share some of those thoughts, given how important I believe them to be for all of us, and the extent to which this whole topic seems to get virtually no mainstream press coverage, amazingly enough.
The broad point I want to make here is that I believe that a huge part of the UK's current malaise has to do with the extent to which we have effectively eviscerated our stock market since the 1990s. This is incredibly poorly understood by most of the population (and most of our politicians too seemingly).
To give some stats to credit this position:
- In 2007, the UK had more than 3,250 companies listed on the London Stock Market. Today we have fewer than 1,800. Hardly anyone knows this - even a good number of finance professionals and journalists.
- A generation ago the UK stock market was 10% of the value of the global stock market. Today it is 3-4% depending on how you calculate it.
- Of 14 British biotech companies to float on a stock market since 2018, 12 of them did this overseas - primarily in the US. The UK has now not seen a biotech IPO for eight consecutive quarters - and only raised £12m in Q1 of 2022 - the last time there was a biotech IPO. This matters because we have world-leading science and should be building stock market sized biotech companies!
- Arm Holdings - the largest company the UK has built in a generation - is listed in the US.
- Many of our other biggest companies now have their primary listing overseas, including BHP Billiton, CRH, Flutter Entertainment and plenty of others. Hundreds of billions of value has left our shores.
- Many others may follow: Rio Tinto, Shell, BP, HSBC, BAT, Astra Zeneca, Ashtead, Unilever, RELX and others.
Source: Simon French via X
Why?
There are plenty of reasons that this has happened, but if you were forced to choose the single most important one, I believe it is captured in the chart above. This comes from the excellent Simon French, Chief Economist at UK mid-cap stock broker Panmure Liberum, and regular contributor to The Times and Sunday Times.
The dark blue bars in the chart show what percentage of the value of the global stock market each of those countries' stock markets represent. The lighter blue bar shows the percentage of those countries' domestic pension assets allocated to their own stock market.
Australian shares make up 1.3% of the value of global stock markets. But Australian pension funds have 37.7% of their assets invested in Australian shares. US shares are 43% of the value of global shares but 63.5% of American pension fund assets are in US shares. And so on for most of the other developed countries in the world as you can see in the chart above. As Simon puts it:
"Every major pension industry in the developed world is hugely overweight its domestic equity market - by an average of 2,089%. The UK is 41% underweight its own."
British pension funds have gone from having more than 50% of their assets in British shares a generation ago to somewhere between 4% and 6% today, depending on which numbers you're looking at. We are basically the only developed country in the world behaving like this. The downstream impact of this has been utterly ruinous to our economy - and will continue to be unless we can turn the proverbial ship around.
The most galling thing about all of this, is that this has been almost entirely of our own making. This reality is largely a function of dreadful policy decisions going all the way back to Tony Blair and Gordon Brown, but under successive Conservative regimes too. (A topic for a future email).
Many people ascribe the problem to Brexit. This is a simplistic position and fails to recognise numerous other factors, not least the fact that this has been a slow motion car crash that has taken place over nearly 30 years.
Why does this matter?
This matters enormously - for the British economy and for British society: Because we have exported vast amounts of our capital abroad, and put most of the rest of it in fixed income (bonds), British shares now trade on a 40-60% discount to shares in other stock markets.
This is hugely problematic, because it means that British companies are at a massive disadvantage commercially. They have to pay twice as much in terms of dilution to raise money to fund their own plans and / or to acquire other companies. This is why so many of our companies are going abroad, taking enormous quantities of wealth, employment, tax revenue and intellectual property away from the UK.
This point is incredibly poorly understood, in the main because so few people really understand how the stock market works and how "equities" are used to build businesses.
Too many people suggest that British companies are undervalued because they're simply not as good as "better quality" success stories from overseas. But this fails to understand the crucial importance of capital depth, the ability of companies to raise money to invest and make acquisitions, and the multiple at which they can do that versus their competitors.
Plenty of US companies now valued in the multi-billions could never have got there had they confronted the same domestic funding environment as British companies have faced for the last few decades. They would have gone to the wall long ago.
Uber managed to lose fully $31.5 billion from 2014 until it made its first profit last year, but is now valued at just shy of $150 billion. If they had been British, and facing the equity funding environment in the UK, they would almost certainly have been viewed as an uninvestable, terrible, low-quality, loss-making business, and gone bust a long time ago.
I concede that Uber is a pretty extreme example, and the UK is unlikely to be able to fund a company that loses more than $30 billion over nearly a decade before getting to profitability, but this is still an example of why we are failing to build large companies - because our equity market is a mess and there is simply far too little capital available. Very few people outside of a few folks in the City have any real understanding of just how bad things are.
There is a real chicken and egg problem here. If the UK still had that £1.5+ trillion of capital which has gone into bonds and / or abroad available to support British companies, we would have a far better shot at building successful companies and keeping the economic benefit in the UK. The cascade of negative outcomes here is enormous.
It is also worth noting that in 2021, smaller companies accounted for 61% of employment and more than 50% of turnover in the UK economy. Plenty of that comes from very small companies, but small, stock market listed companies, that are rather bigger than e.g. a florist or a local restaurant, should be the engine room of an economy.
With an effectively functioning London stock market, such companies should be creating huge economic value and paying many billions more of tax. We've lost nearly 1,500 of them in less than thirty years as I've shown above.
Smaller stock market listed companies are also where larger companies should come from - in a functioning economy at least. Not that long ago, even Apple was a relatively small manufacturer of bright pink computers for artists. Without the capital depth (and patience) afforded them by the US investment industry, they never could have become the $3 trillion behemoth they are today.
The biotech angle...
I feel this situation particularly acutely by virtue of having spent ten years focused on the biotech industry. By rights, given the pedigree of our science and what our capital markets used to look like, Britain should absolutely be building multi-billion pound value life sciences companies.
In fact, I would argue that there is no reason why Britain shouldn't have managed to produce a company valued at around half a trillion dollars by now, just as Denmark has done with Novo Nordisk, for example, or even a trillion dollars+ in the fullness of time.
In my experience, it is the lack of capital in London that has prevented this from happening, and the fact that so many of our companies have had to go overseas as a result (or even out of business).
To get an idea of the dividends the creation of just one massive company could pay for British society (literally and figuratively) - US chip manufacturer, NVIDIA, has just created thousands of people who are millionaires, hundreds of whom are worth $10m or even $20m - with all that this implies for the US economy and tax receipts.
Of course, this rests on a very high share price, which may come down, but the overall point still stands: The reason Britain is increasingly poor, is because we have ripped apart our stock market, it is incredibly hard for British entrepreneurs to build businesses, and so many of them are just giving up and moving abroad (in their thousands as we all know). And this is an egregious case of our political class having shot ourselves in the foot over many years.
All of this, by the way, goes a long way to explaining why UK GDP per capita (annual average income) has been stagnant at around or just north of $40,000 a year for decades, when places like the US, Singapore, Australia, Ireland, Denmark and many others have seen theirs massively increase in the same time frame. All too few people realise just how much this has had to do with the extent to which we have blown up our equity culture.
Not even an electoral issue...
Vanishingly few people understand this stuff and not far off none of our politicians seemingly. I was more than a little astonished earlier this year, that this wasn't even an electoral issue for example. I listen to the Today programme on the BBC most mornings, and I don't recall this broad topic ever being discussed. Do you? Plenty about whether to send immigrants to Rwanda or not, and Angela Rayner's property exploits, but essentially nothing whatsoever about what I would argue is our paramount problem as a nation. Outside of the specialist financial press, there was almost no discussion of this as arguably the primary underlying driver of the UK's malaise.
Even now, there are endless column inches and social media posts about whatever Keir Starmer's deep dark secret may or may not be this week, but complete tumbleweed around any of the points I'm making in this email - which are key to diagnosing why the UK is in the pickle it is in. Our "elites" are doing a huge quantity of "fiddling while Rome burns", that's for sure.
The first step to solving a problem is acknowledging you have one. Our political class (both Labour and Tory), seem to have no understanding of this stuff - as far as I can tell at least, preferring to spout platitudinous nonsense about just what a tech superpower we are. They're either not looking at the numbers, or they're just very good ostrich impersonators.
Similarly, more than 90% of British adults don't have a stocks and shares ISA, which suggests that there are very few who understand these points or why they're so critical for the future trajectory of the UK economy and to our society more broadly.
I would argue that if we are to chart a course back to growth, wealth creation and a fundamentally better society, we need several million more people to know about and understand the points I'm making in this email.
If you agree, and if you care about this stuff, please do share this email to anyone you think might also care. We really do need more people to be aware of these problems than are at present.
Reasons for hope!
Colin and I covered a great deal of all of the above in our discussion.
Happily (you will hopefully be relieved to hear), we also spent a fair bit of time discussing many of the reasons there are to hope that all may not be lost!
The biotech industry can and will deliver an enormous amount of economic value, and there is still scope for a fair bit of that to accrue to the UK (if we get our act together). Please do check out the podcast if you'd like to hear more on all of the above.
Our Future is Biotech
Of course, I cover a great deal of all of this in my new book, Our Future is Biotech too. Please do consider grabbing a copy if you want to hear the good news in a little more detail!
