Rational Exuberance - The Equitile Blog

13th June 2019

Posted by: Andrew McNally

What are Stock Exchanges for?

A report out this week from think tank, New Financial, raises some crucial questions. What are Stock Exchanges for and Why Should We Care? takes a deep dive into the shrinking role of stock markets across the developed world and what this means for society beyond the City of London. The report’s main author, William Wright, draws on extensive data to make his point and suggests some very sensible policy approaches to resolving this problem – it is well worth a read.

The report resonates with the team here at Equitile and I explored some of the ideas in my book, Debtonator, a few years back. For those of us who have been around for long enough, however, the report also charts a more personal experience.

Although my parents were not the sort of people to invest in the stock market, it was always part of my youth. Every night, just before the weather forecast, the BBC News at Ten would run the stock market report - “The Footsie closed up by ten points at 1050, the Dow Jones up by twenty-two points at 1234 and the pound traded down against the dollar at 1.42”. I can’t claim I knew what it all meant but the message was clear; the stock market was important – there was something, perhaps, to aspire to.

It was the infamous “If you see Sid tell him” campaign during the privatisation of British Gas in 1986, however, that brought those arcane BBC reports to life for more than more than just a few. The virtue of owning a stake in a business listed on the stock exchange was now the domain of many more families, mine included, than it had ever been before.

The BBC News no longer runs the stock market report every single day – generally, they only mention it when it’s crashing. Testament, in many ways, to the declining role the stock market plays in our lives. What we in the industry call “de-equitisation” has left companies less reliant on the stock exchange for funding and, more worryingly, fewer people inspired to own a stake in it. “Sid”, as it turns out, sold his shares a long time back and the stock market is once again the domain of just a few.

There have, of course, been positive developments over recent decades – low-cost index funds, the introduction of tax-efficient savings wrappers and online investment platforms have all made it cheaper and easier to own equities. In practice, however, the disparity in equity ownership is greater today than it has been for many years. Even pension funds, driven by regulation and perceived best practice, have significantly reduced their allocation to the stock market.

Why does this all matter?

Firstly, the equity contract is the most effective recycler of wealth created by economic progress there is. The more people own equity, the more people reap the financial rewards of economic growth – a natural antidote to the destabilising effects of excessive wealth polarisation as we observe today.

Secondly, the virtue of broad ownership beyond just the financial benefits is not being captured as well as it could be. Greater sharing of risk and return through a more relevant stock market would not only bring greater stability to our financial system, but it would encourage the sense of independence, responsibility and shared-endeavour that our society increasingly lacks.

The solution goes beyond the stock market itself. More equal tax treatment of equity finance relative to debt finance, a regulatory culture that encourages broader ownership rather than one that stands in its way and reform of our pensions industry are just a few areas where we could start to redress the balance.

A “re-equitisation” of our economy, with the stock market at its core, would not only stabilise our financial system, but it would bring the full value of ownership back to the heart of our society.


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