Should we bring back a Scottish Stock Exchange? Much interest has been aroused by the publication by the London Business School (LBS) and Walbrook Economics last week of the Scotsie 100 Index of Scotland’s top 100 quoted firms.
The research was driven by the question: what if an independent Scotland follows other newly- independent countries and sets up its own stock exchange?
Coming just weeks ahead of the independence referendum, it focuses attention not only on the considerable number of major companies located in Scotland but also on the merits of having a Scottish Stock Exchange where their shares can be traded. As Paul March and Scott Evans of the LBS point out, of the 32 new, or newly liberalised, independent countries of the last 25 years, all but Turkmenistan and Kosovo have set up stock exchanges.
So why not Scotland? After all, Scotland once boasted four stock exchanges until they merged into one in 1964. But barely had the joint body moved to prestigious offices in Glasgow’s St George’s Place than it merged in turn into the London Stock Exchange in 1973 – unable, as Glasgow wit had it, to recover from the shock of the street plaque on the wall being changed to Nelson Mandela Place.
The LBS Scotsie 100 comprises some leading household-name companies, including SSE, Aggreko, Weir Group and Cairn Energy. A distinctive feature is the predominance of financial companies including Standard Life, RBS and Aberdeen Asset Management, and there are no fewer than six investment trusts appearing in the top 20.
How would the Scotsie 100 have performed over the last 60 years? Not that well, unless you hold a hand over one eye. The boffins calculate that £1 invested in the Scotsie 100 in 1955 would have grown to £648 today (with dividends reinvested), a 5.7 per cent a year increase in inflation-adjusted terms. However, £1 invested in the rest of the UK would have grown to £1,168, a 6.8 per cent increase. The poor relative performance is due to the slump in banking giants HBOS and RBS. When financial firms are excluded, Scottish stocks outperformed the rest of the UK by a small margin.
Even allowing for this, those 60 years have not been kind to Scotland’s quoted companies. There are 100 Scottish stocks today, issued by 97 companies, compared with 200 in the mid-1960s: a rate of attrition that has left an unbalanced list of finance-dominated activity. Few portfolios in 1955 were without Burmah Oil, Distillers, Coats Patons, General Accident, Inveresk, Clan Line Steamers and William Baird. Manufacturing accounted for 45 per cent of the Scottish index back then, compared with 14 per cent today.
True, we have some highly successful investment companies. But as the authors note, the idea that “distance from the noise of London” gave Scottish investment trusts an edge is a myth: Scottish trusts have marginally underperformed their rest of UK counterparts since 1955 (12.4 per cent growth a year against 12.7 per cent).
The idea of a resurrected Scottish Stock Exchange ignites visions of a dynamic, pulsating market in “Scottish” shares on home territory. But our economy is highly integrated with the rest of the UK. Many of our businesses are also much more global than they were in 1955. In any event, firms would be loath to switch from the London Stock Exchange with its far greater liquidity and international reach.
As for our proud history of investment trusts, what is the “Scottishness” of Templeton Emerging Markets, which is in the top 20? Or Personal Assets Trust, with its large holdings of gold bullion and US Treasuries? There’s little, if any, investment in Scotland at all.
The example of Ireland – the closest comparator for Scotland – does not augur well. The FTSE World Ireland index plunged from a value of €95 billion (£75.2bn) in 2007 to just €33bn by the start of this year as banking shares collapsed and many firms moved from the Dublin market to London.
Attempts to revive regional exchanges have not gone well. Investbx, an online exchange, was set up in 2007 to fund smaller companies in Birmingham and the West Midlands. After four years and £3 million of public money it had attracted just three companies. It was sold in 2011 – for £1.
Beware, warn the authors, of being beguiled by romantic notions of a world that never really was. Regional exchanges gave up the ghost in the 1970s and there are better uses for public money. Better for Scotland’s smaller companies to continue using the Alternative Investment Market than set up a local version, and for public funds to be directed towards supporting our own venture capital market and private equity industry.