In the UK, they have these individual savings accounts (ISA)s. They’re great — a personal savings account into which you can chuck £20,000 per year, tax-free. There’s no tax on income or capital gains within the ISA. They’re flexible and cheap. And unlike a pension, you can take the cash back out whenever you like.
It would be nice for Irish people to have some way of putting aside money for something other than retirement, without being charged 53 per cent for the privilege. But we are where we are.
Now the UK government has had the idea that it is going to fix the lacklustre UK stock market by changing ISA rules.
The London Stock Exchange is dying a slow death. Its flagship index, the FTSE 100, has risen 11 per cent in the last 24 years. It’s hard to fathom how bad this is.
The thing about the FTSE is, it hasn’t had some appalling crash or implosion. It’s hard to even point to anything in particular that has gone wrong. What’s happened is… nothing. Instead of going up — like a normal stock market — the FTSE has faffed about at the 6,000 level. Since 2000, excluding dividends, the FTSE100 has returned a total of 11 per cent. The S&P500 index of US shares has, meanwhile, risen by 262 per cent.
It’s one of these slow-burning crises. On any given year it looks okay, but then you Google “FTSE100 20 year performance versus S&P500” and you realise how bad things have got.
This is bad for savers but also bad for companies listed on the LSE. A low stock price means companies have to pay more for their capital. Any projects they embark on need to generate a higher return to be worth doing.
The UK government has decided it’s time to act. It’s going to help the London Stock Exchange. The way it has decided to do this is to change ISA rules. Chancellor Jeremy Hunt has proposed a “British ISA”, which amounts to a £5,000 increase in the ISA allowance — provided the money is invested in British assets. The chancellor’s idea is to funnel money from ISAs directly into the stock market, boosting returns in the process.
The British ISA story raises deep questions about investing. What makes stock prices go up and down?
Supply and demand for financial assets seems like a sensible answer. By fiddling with the ISA rules, Jeremy Hunt is increasing the demand for British assets, which should make stock prices go up, all things being equal.
But another thing we know is that the prices of securities traded on a public exchange are not the same thing as tomatoes traded at the farmers’ market. Publicly traded securities have strange emergent qualities that tomatoes do not have. One of those is that they accurately incorporate all publicly available information, making them nearly impossible to speculate on. Nearly-perfect asset prices incorporate future cash flows and the risks to those cash flows.
Would fiddling with the tax rules permanently change the expected return on British stocks? If it did, you’d expect to be able to, for example, make money by systematically betting against the most popular football teams (like the Dubs in GAA). But that strategy doesn’t work because everyone knows the Dubs are the best-followed team and they bet accordingly.
The Brit ISA seems to reveal a misunderstanding of what investment is about. Investment is often imagined as a two-dimensional thing that happens on a screen. It’s imagined to be about charts, numbers, models, and theories.
But all that stuff is a means to an end. The end is three-dimensional things that exist in the real world. When you get down to it, the purpose of investment is to create new assets. And assets are not just entries on a balance sheet. They are real things in the world. The purpose of investment is to make new things.
What new things, specifically? A few decades ago, it was overwhelmingly buildings and machinery. Physical stuff like houses, offices, factories, and trucks still make up the majority of the new assets. The rest is made up of information assets — like software, databases, movies, and songs.
The Brit ISA is the kind of idea you’d come up with if you conceived of investment as numbers on a screen, rather than real stuff in the world.
Meanwhile in the UK, another arm of the government makes it incredibly difficult to actually create new assets. The UK’s planning system is a first cousin of Ireland’s, and it’s even more restrictive than ours. The country is starved of homes, lab space, reservoirs, transport infrastructure, hospitals, and all the assets a country needs.
This is what investment is about. If the UK focused on making it easier to build new physical assets, it might find the numbers on the screen start to move in the right direction.
