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I am a child of the 1980s. It felt like the first part of my working career was dominated by the first chart below. It shows the total return from UK residential property compared to the total return from global equities from 1988 to 2007. A few obvious things: (i) residential property hugely outperformed equities in this period, (ii) it did so without the dot-com crash which saw equities halve in value between 2001 and the end of 2002 and (iii) you could leverage your property investment by taking out a mortgage. The last point meant that if house prices doubled (as they did almost 3 times in this period), then a borrower with a 90% mortgage would increase their property equity investment by 10 times each time it did so. For many people (my parents included) rising house prices was the main source of wealth creation for these two decades.
But that was then. Here is the same chart but from 2007 onwards.
Equities have been a much better source of wealth creation in recent years than residential property. To estimate the total return from property I have added in a 4% per annum income return here (to mimic the net returns of a buy-to-let investor). If you strip this income out, headline house prices failed to keep up with inflation over this period, rising at 2.5% p.a. compared to 3.0% p.a. for UK CPI inflation.
I mention this because this week the UK Labour government have proposed measures that would potentially increase equity ownership by UK households (the so called “Leeds Reforms”). Listed equity ownership remains low both here and in Europe compared to the US (as the chart below shows). I can’t help feeling that many people’s experience of the 1990s and early 2000s is a big contributor to why equities are under-owned in the UK.
Low equity investment also reflects low investment levels overall for the UK. We have had the lowest investment rate (both public and private combined) of the G7 countries since 1994 (running at 18% p.a. compared to the G7 average of 25%). Any reforms which aim to get this number up I therefore support.
The specific reforms proposed by Rachel Reeves will make it easier for banks and advisers to market equity investment products. This probably won’t have a huge effect by itself but there is also the Mansion House Accord where UK institutional investors have (voluntarily) pledged to invest 10% of their portfolios in assets that boost the UK economy (such as infrastructure, property, and private equity). And finally, it is worth noting that the relentless selling of UK equities by UK insurance companies and pension funds may finally be coming to an end. These two sectors made up over 50% of the UK equity market in 1994. Today that number is less than 5%.
I wrote last week that pessimists sound smart but optimists make money. What could go right here? The first point I would make is that any push to reduce the regulatory burden, which the Leeds Reforms look to be, is to be welcomed. For one thing, the loosening of the regulatory pressure the banks are under may help the property market get going again. The second point is the flows story for the UK market may finally be reversing. Institutional selling (represented by the light blue section in the chart above) looks to be (nearly) over. The Leeds Reforms and Mansion House Accord might yet generate some positive inflows. UK equities have out-performed this year. If domestic investors do indeed return to the market, my final chart shows there may yet be some more good news to come.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
