Today is the Queen’s 90th birthday and I thought a good reason to have a look back at how UK equities have fared over almost a century. When the Queen was born in 1926, the UK economy was still struggling to recover from the First World War, there was high unemployment and the national debt stood at 160% of GDP (it’s 83% today). It was also the year of the General Strike.
Assuming you were lucky enough to have £100 to invest in the stockmarket (around £5,500 in today’s money) how would that investment have grown? Well, over the period (using data from the Barclays Capital Equity Gilt Study 2016), £100 invested in UK shares in 1926 would have returned £14,045 by the end of 2015 (taking into account the effects of inflation over this period, gross income reinvested). Shares would have provided good protection from inflation, and at the same time, produced some real growth. Inflation hit some extreme highs over the 90 years, yet shares remained pretty resilient.
But what of the journey in between? The above chart traces the ups and downs of that £100 invested in the shares of UK companies. It took a while to double the original investment – £210 by 1942 – but by the early 1970s, investors may have been feeling fairly confident as the £100 had grown to £1594 in 1971. Then, what appeared to be Armageddon hit with the oil crisis, industrial unrest and the three-day week; UK shares plunged 35% in 1973 and 58% in 1974. By the end of 1974, the original £100 investment had dropped back to £469.
But to have panicked and sold out then would have been a mistake; yes, there were a number of crises including Black Monday in 1987, the poll tax riots in 1990 and the Long-Term Capital Management bailout in 1998, but shares continued to rise strongly until 2000 by which time that £100 had grown to £11,343. Even though shares then had a rocky ride through the ‘noughties’ – the ‘lost decade’ – not to mention the GFC in 2007-08, the original investment still gained £2,702 between 2000 and 2015. The advice to buy and hold takes on an extra resonance when you look at it over 90 years.
I also had a look at how the UK market’s changed over that time. The first official share index – the FTSE 30 – was launched in 1935 and is still in existence today albeit somewhat overshadowed by the FTSE 100 and others. All constituents in the FTSE 30 are equally weighted and only change when a company needs to be removed for some reason, such as merger or failure. The following table compares the constituents in 1935 with those today and highlights the stark changes in the UK’s industrial landscape.
Textile companies and coal mines have been replaced by service sector and financial companies and only two of the original constituents have remained in the index to the present day – global engineering group GKN and food ingredients business Tate & Lyle. Rather like the roll call of the football premiership teams in 1992 compared with today, many have fallen by the wayside – household names, such as FW Woolworth, General Electric, Pilkington and ICI. At its peak in the 1980s, ICI was seen as the beacon of success for British industry regularly achieving over £1bn in annual pre-tax profits. But various deals in the 1990s led to huge debts and it was finally taken over by Dutch company AkzoNobel in 2008.
New entrants to the FTSE 30 are picked to reflect the breadth of the UK economy and should be a leader in their sector with liquid shares. In contrast, the FTSE 100, which was introduced in 1984 and contains the largest 100 companies as determined by market capitalisation, is a more international index. Around 80% of FTSE 100 companies’ turnover is derived from overseas sales. As an investable index, it is far superior to the 30. But its large weighting towards international companies with few UK ties makes it less reflective of the domestic economy. Interestingly though, only four companies in the FTSE 30 – Ladbrokes, Man Group, Smiths Group and Tate & Lyle – fail to make it into the FTSE 100 as well.
What have I learnt from my nostalgic look back at the UK equity market? ‘Keep calm and carry on’; in other words, stay invested in a diversified portfolio for the long term. However, remain cognisant of changing trends and developments, as the company at its peak and seemingly untouchable today may not be around forever. In my personal experience of over 30 years in the financial markets, whenever I’ve heard the three ‘As’ – Apocalypse, Abyss and Armageddon – being used at the same time by market commentators, it’s marked a turning point for shares. And as the numbers clearly show, equities are resilient and have withstood many ‘end of the world’ crises over the past 90 years.
Happy Birthday Your Majesty, have your great grandchildren got a junior ISA?
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.