Unhappy returns

BRITAIN

Equities

Feb 10th 2005
From The Economist print edition

Investors have done badly under Labour

SHARE prices have had a good run in the past few months. The FTSE 100 index has risen from around 4,300 half a year ago to break through the 5,000 barrier in trading on February 9th. That's the highest equities have been since mid-2002.

Unfortunately for investors, share prices will have to climb a lot higher before the FTSE 100 returns to its all-time peak of 6,930. The last time the stockmarket reached that level was at the end of 1999.

The bursting of the high-tech bubble is the main reason why the stockmarket has done so badly in the past five years. The IT, telecoms and electronics sectors have done spectacularly badly since early 2000, point out economists at the London Business School (LBS) in their yearly analysis of long-run global investment returns for ABN Amro, a bank.

Yet what is remarkable about the performance of the stockmarket is that equities have done so much worse in Britain than in other countries since Labour came to power in 1997. Since the start of that year, the real value of equities has shrunk by 0.1% a year (see chart). By contrast, it has grown at an annual rate of 5.1% in France, 4.2% in America and 1.6% in Germany.

The picture looks somewhat better for total returns, which include reinvested dividends. In real terms, total returns in Britain have been 3.0% a year. That's only a little less than Germany's 3.4%. The gap with America, where returns were 5.7% a year, also narrows. This is because British companies generally pay quite generous dividends. However, the French stockmarket still puts Britain's in the shade with total real returns of 8.6% a year.

Many investors will know whom to blame. Last year, John Littlewood presented a charge-sheet against the Labour government in a publication by the Centre for Policy Studies, a right-of-centre think-tank. He said that the stockmarket had been weakened by Gordon Brown's tax raid on pension funds. The chancellor's public spending spree was diverting resources from the wealth-creating private sector. And the Labour government was strangling companies with more and more costly regulations, which were eating into their profits.

Yet Mr Brown could quite legitimately retort that Britain's economy has done well with him in charge. Inflation has been tame, unemployment has fallen and the economy has relentlessly kept on growing. Germany may have outperformed Britain as far as stockmarkets are concerned, but Britain has been doing much better than Germany on the economic front.

But does a strong economy necessarily imply a strong stockmarket? It is natural to suppose that the two go hand in hand, since a buoyant economy should push up profits and dividends. Yet as Elroy Dimson, one of the authors of the LBS study, points out, the historical evidence does not back up the supposed link between growth and stockmarkets. If anything, strong stockmarkets tend to predict strong growth: investors get there first.

If this is the case, there is an uncomfortable corollary. Britain's poor stockmarket performance over the past few years may be signalling that the economy's long run of good performance will not last. In the general election campaign, Labour is making much of its record in managing the economy. Fortunately for the Labour government, any economic reckoning will occur safely after a spring election.

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