The investment world has lots of strange traditions and conventions that can seem out of place in the 21st century. COVID-19 has challenged several of them already.
Until March this year, traders on the floor of the London Metal Exchange (LME) had to have their leg touching a central sofa in order for a trade to be valid. Entertaining to observe, the practice didn’t survive social distancing, and the LME is now embracing electronic trading.
Another convention, though, is far more widely embraced than an idiosyncratic commodity trading floor. It’s the idea that a country and its main stock market are meaningfully connected. That’s just not the case.
The investment world has lots of strange traditions and conventions that can seem out of place in the 21st century. COVID-19 has challenged several of them already.
Until March this year, traders on the floor of the London Metal Exchange (LME) had to have their leg touching a central sofa in order for a trade to be valid. Entertaining to observe, the practice didn’t survive social distancing, and the LME is now embracing electronic trading.
Another convention, though, is far more widely embraced than an idiosyncratic commodity trading floor. It’s the idea that a country and its main stock market are meaningfully connected. That’s just not the case.
A historical habit
The investment industry has a bad habit of talking about ‘UK stocks’ or ‘US equities.’ Like many bad habits, it started for understandable reasons.
When public companies first came into existence they did so to raise money from local investors, in order to carry out their business. Stock exchanges sprang up as convenient places for these investors to trade their shares, and for companies to issue new ones. The point, in the pre-information age, was to have an agreed place to carry out financial transactions.
Up until the early 20th century, links between stock markets and economies made sense. Local businesses raised capital from local investors. While these companies’ commercial activities were often global, the profits came back to the home country – where they were spent, taxed, or reinvested. If the shareholders were doing well, so was the economy (most of the time).
Modern markets
Today, stock markets look very different, for two main reasons. The older companies have outgrown their domestic roots, while many newer businesses ignore geography altogether.
The FTSE 100, for example, includes lots of companies that started small and local, but nowadays the UK is just a handy place to keep a head office. Drinks brand Diageo makes roughly 5% of its revenue from the UK. AstraZeneca and GlaxoSmithKline rely on the UK for less than 10% of their sales. Even the London Stock Exchange Group makes only about half of its money in the UK!
And for newer large companies, the country or city where they choose to list their shares often has nothing to do with their business models, or where they make their money. It tends to be a matter of tax optimisation, prestige and availability of global investors.
Take Aramco, the huge Saudi Arabian state oil company, which was at one point looking to list in either New York, London or Hong Kong.
Focus on sector exposures
Many investors are making the wrong connections, by focussing on the prospects for a certain economy, then deciding whether to invest or not in its market. For example, Japanese equities might do well thanks to a new prime minister or the country’s inflation outlook.
