Britain’s ability to attract so much foreign capital has saved us
IF you want to understand why it is so vital for the UK to remain an open economy, look no further than our front page story on who now owns British firms. For the first time, more than half of all the shares in UK-listed companies – 53.2 per cent, to be precise – are now owned by foreigners. Just 46.8 per cent are owned by UK based individuals or institutions, a record low.
It’s an extraordinary shift which confirms just how integrated the UK has become with the global economy and financial system. Britain would be toast in the event of capital controls or protectionism rearing their ugly head again; remarkably, this shift has continued despite the financial crisis.
Of course, the internationalisation of capital flows and investment goes both ways: UK individuals, companies and institution own lots of foreign shares, companies and properties. We derive dividends and interest payments from those assets, bringing money back into the UK – and foreigners engage in the reverse process.
There are a number of reasons why all of this has been happening. Global investors believe that many UK based firms are attractive; in part, the shift is therefore a sign of the world’s confidence in Britain’s listed companies, our corporate governance and the fact that we treat foreign investors as well as domestic ones. Wealthy foreigners are buying homes in Kensington; they are also shifting billions into UK companies, providing vital equity and debt financing and paying for investment.
The global takeover of UK Plc also mirrors the globalisation of the FTSE 100, now made up of many companies that conduct little business in the UK, and in some cases that have no connections with Britain’s domestic market at all (such as Coca-Cola Hellenic Bottling Company, a recent FTSE 100 entrant). Britain has become a servicing centre and base for some global giants; no wonder their shareholders come from all over the world.
The fact that emerging markets are becoming wealthier means that they are also investing more abroad, and that is naturally increasing the share of continents such as Africa in the shareholder registry of UK firms.
The old home bias problem – investors were irrationally likely to invest in their country, rather than truly seeking out the best opportunities – is waning. UK investors are more likely to own assets abroad, and foreign ones more likely to be comfortable buying in the UK. The process of matching those with savings and those with capital-raising needs can progress more efficiently.
There are also bad reasons for the shift. UK pension funds have massively sold out of equities and moved into bonds in recent years, a decision partly fuelled by mark-to-market accounting standards. This will eventually cost them dear. The UK has also been running a current account deficit; one way to plug the gap is to pay for exports by handing over capital.
The globalisation of UK Plc also means that the days when British insurance companies ruled the roost in the City are over. Boards have to deal with shareholders from all over the world. This needn’t make it harder to hold directors to account: as a Deloitte study reveals, total remuneration for FTSE 100 CEOs has stopped growing, with cash payouts down 5.8 per cent this year matched almost exactly by a rise in the value of shares vesting from incentive plans. The annual bonanza of yore has ceased.
One thing is certain, however: global investors will be less good at understanding UK politics. That is perhaps why, bizarrely, the share price of the energy firms barely moved yesterday after Ed Miliband’s absurd and counter-productive pledge to cap prices. They finally slumped this morning, robbing shareholders of a fortune. In a world characterised by extreme capital mobility, countries can no longer afford to inflict these kinds of economically illiterate wealth-grabs.
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