The fall in the UK stock market must be seen in a broader historical context
IIT’S Tempting to look at the history of Great Britain and conclude that the loss of its empire made the relative decline of its stock market inevitable. But Britain isn’t the only one that has swelled and withered over the centuries since the idea of raising capital by selling shares to the public gained popularity. The fortunes of the world’s major stock exchanges have fluctuated throughout history. In recent decades, two important trends have driven these changes: the rise of Asian stocks and the growing importance of the tech sector. The UK market was crushed with more force than those of its peers, exacerbating its decline. But these are just the latest twists in 200 years of stock market history.
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The American and European stock markets took off for the first time in the 19th century. Successive craze for investing in canals, Latin America and railways has led to the creation of hundreds of companies that have raised capital in London, says Bryan Taylor of Global Financial Data, a provider of historical statistics. “After most of the European railways were built in the 1850s, British investors started funding American railways instead,” he says. The UK stock market has become a channel for investing in a series of companies in Canada, India, South Africa, Australia and South America.
It was not the only hub for raising capital for overseas companies. At the start of the 20th century, the shares of hundreds of companies were traded simultaneously in London, New York, Paris and Berlin. America’s domestic growth was also striking. The First Bank of the United States raised $ 10 million ($ 291 million today) when it was incorporated in 1791. The incorporation of dozens of other banks and insurance companies followed. In 1911, the combined value of the British, American, French and German markets peaked at $ 49 billion, or over $ 1.4 billion today, a 175-fold increase from the previous century.
Two world wars later, a hampered and fragmented European market offered little challenge to American domination (see graph 1). During the fighting, the stock exchanges were largely closed. When the exchanges were able to open, they had often been subject to price restrictions that limited trading. Currencies were devalued and capital controls were imposed, complicating cross-border flows. Hyperinflation in Germany and much of Eastern Europe, combined with the rise of communism, had wiped out many investors. For decades after the end of World War II, governments’ drive to regulate and nationalize many industries kept European stocks firmly in check.
The challenge to America, when it appeared, came from Asia. The gradual return of globalization (which only returned to its pre-World War I level in the 1990s, as measured by the flow of capital and goods) led to a dramatic increase in Asian exports. Japanese stocks, in particular, flourished. Before 1960, the Asian stock market was worth less than 5% of the world market; by the 1980s, it had eclipsed that of Europe. In 1989, it accounted for almost half of the world’s market capitalization, in large part because of the Japanese asset price bubble. Two years later, that bubble had burst and Japan’s fortunes had collapsed. It was time for the Shanghai and Shenzhen stock exchanges to mature and set the stage for China’s rise as a financial superpower.
China and America are by far the most important centers for raising equity capital today. According to Dealogic, a financial data provider, America has so far seen 750 initial public offerings (Initial Public Offerings) in 2021, for companies with a total value of $ 242 billion. China, including Hong Kong, has counted 427, for companies worth $ 72 billion. Compare that with France, Germany, the Netherlands and Great Britain where this year the combined value of companies completing Initial Public Offerings this year only reached $ 45 billion.
The shock of the new
Nor is it just because of the size of their markets or the volume of their Initial Public Offerings that China and the Americans are outperforming their competitors. They are also more focused on the type of innovative firms likely to stimulate future growth (see Figure 2). Add up the worth of five of America’s tech superstars – Google, Apple, Amazon, Facebook, and Microsoft – and you end up with a market that’s worth more than the 1,964 companies listed on the London Stock Exchange.
A penchant for technology has its drawbacks. US stock returns increasingly depend on the fortunes of a handful of tech giants. China’s repeated crackdowns on its tech companies are all the more worrying for investors in the stock markets they dominate. This is especially true of the growing number of foreign shareholders who find the mood of the Chinese Communist Party difficult to analyze. But countries with poorly innovative markets could learn from 19th century British investors. Back then, companies that built railroads were also technological pioneers. ■
This article appeared in the Briefing section of the print edition under the title “Who’s up, who’s down?”