Interior of the London Exchange, The Illustrated London News, March 25, 1854.
Bloody Foreigners! Overseas Equity on the London Stock Exchange, 1869-1928.
by Richard S. Grossman, Wesleyan University (firstname.lastname@example.org)
Abstract: This paper presents data on quantity, capital gains, dividend, and total returns for domestic and overseas equities listed on the London Stock Exchange during 1869-1928. Indices are presented for Africa, Asia, Europe, Latin America, North America, Australia/New Zealand and for the finance, transportation, raw materials, and utilities sectors in each region. Returns and volatility were typically highest in emerging regions and the raw materials sector. Dividend yields were similar across regions and differences in total returns were due largely to disparities in capital gains. Returns of firms in more industrial markets were relatively highly correlated with each other and with developing regions with which they had substantial colonial or trade connections. Contingent liability was most extensively employed where leverage was high and the physical assets were either meager or inaccessible to creditors.
“The nominal value of the securities listed [in the London Stock Exchange] went from £2.3 billion in 1873 to £11.3 billion in 1913; in other words, more than the New York Stock Exchange and the Paris Bourse combined. As evidence of its highly cosmopolitan character, foreign stocks, which represented between 35% and 45% of the total in 1873, exceeded 50% from 1893 onwards. By 1914 one-third of all negotiable instruments in the world were quoted on the London Stock Exchange” (Cassis 2007: 98)
Since it was established in 1801
and most notably during the period commonly referred as the first globalization, the London exchange was the most important market for securities in the world. In this paper, distributed by NEP-HIS on 2014-01-17
, Richard Grossman presents an analysis of newly assembled data on UK and foreign equities listed in the London Stock Exchange between 1869 and 1928.
The study of the performance of equities in London by Grossman offers an unparalleled register of the rhythms of the world economy, from the late nineteenth century until the start of the Great Depression. It thus offers an excellent portrait of the role of the London equities market as the chief financial intermediary for capital flows within the British empire and the rest of the world.
Data to construct annual equities indicators from 1869 to 1929 was sourced from the Investor’s Monthly Manual
, which was digitized
by the International Center for Finance (ICF)
at the Yale School of Management. Grossman describes with detail the problems of determining the industrial sector of each firm in question, the criteria used by the staff of the Manual
and the ICF to ascertain the domestic or foreign nature of the firms therein listed, and accounting issues arising from several other situations, such as a share’s volume of trade and differences between the nominal and market value of shares at different points in time. Grossman uses end-of-January data from 77,248 observations of equity securities, as “equity, a claim on firm profits, may be more likely to reflect expectations about future corporate profits than bonds” (Grossman 2014: 4).
Grossman assembles three series to revise the size of London market: the number of equity issues, the market capitalization of shares (i. e., the market price of a share times the number of shares), and the paid-up capitalization (i. e., the pair or stated value of the share times the number of shares). Total equity issues grew from circa 1,000 in 1869 to around 1,300 in 1884. Equity issues declined in 1885 and 1889 as well as in the period 1911-1919. In 1902 London registered a peak of 1454 issues. The market capitalization of firms listed in London was very volatile and varied greatly throughout these years: the series reached its lowest levels between 1869 and 1875, 1895 (the year of the Bahring crisis) and World War I. As expected, aggregate paid-up capital of firms in the London exchange was not as volatile as total market capitalization, peaking in 1902 and reaching a historical minimum during the Great War.
To assess the importance of foreign equities in London, Grossman evaluates the relative share of non-UK firms in total equity issues. Equity issues for non-UK firms grew throughout the period of study: the share of foreign issues in the London market rose from around 16 percent in 1869 to nearly 40 percent in 1929. Foreign market capitalization and paid-up capital, however, declined overall, with major setbacks occurring in 1870-1875, 1895, and World War I. In the 1869-1929 period, the paid-up capital of foreign firms declined from 75 to 55 percent, whereas the market capitalization of foreign firms diminished from 70-80 to 30 percent.
For most of the period, the average market capitalization of foreign firms surpassed that of British firms. Nevertheless, foreign market capitalization was very volatile, experimenting pronounced falls in the 1870s, 1895 and 1914. The paid-up capital of non-UK firms also exhibited a declining trend, with peaks of circa 12.5 millions of pounds in 1880, 8 millions of pounds in 1888 and 7.5 millions of pounds in 1902. Interestingly, the market capitalization and paid-up capital of British firms never surpassed 5 million pounds, way below the average of their foreign counterparts: not until the beginning of World War I would British firms reach the average size of foreign firms in the London market.
By the 1870s, firms from Asia, Europe and Latin America had the largest equity issues. However, during the 1890s and until before the Great Depression, African firms joined their counterparts in Asia and Latin America in equity issues. Market capitalization of European firms was nonetheless the highest of all non-UK firms between the 1870s and World War I. The Great War inaugurated a period where Latin American, Asian and African firms dominated the London exchange in terms of their market capitalization as these regions experienced booms related to “the discovery or exploitation of raw materials, often bolstered by the development of transportation infrastructure, financial companies, and land exploration and development enterprises” (Grossman 2014: 8).
The Manual does not include information on dividends until 1879. Thereafter, Grossman calculates returns to holding accounting for capital gains and dividend yields paid to shareholders. Grossman’s unweighted indices of capital gains indicate that the equities of African, Latin American and Asian firms were on average more volatile (and profitable) than the European firms listed in the London Exchange, in a “historical pattern of higher returns and volatility in emerging markets echoed in the modern world” (Grossman 2014: 11). Although very volatile, capital gains of African firms were sensibly superior to those of Latin American and Asian firms between 1890 and 1910. By 1929 firms, with operations in Africa, Latin America and Asia had very similar capital gains, well above those from Europe, Australia and North America.
The Investor’s Monthly Manual, January 1895
Capital gains on the equity of British firms grew in the periods 1868-1880, 1884-1890 and 1894-1899. UK capital gains increased very rapidly during the First World War and the 1920s. The gains in the stock value of firms from Australia and New Zealand resembled the performance of UK equities for most of the period, with due exclusion of the 1880s decade. When compared to British firms, the capital gains on North American equities were significantly more volatile. Capital gains on North American equities were substantially lower than those from British firms in the 1883-1903 and from 1912 until the end of World War I, after which they rose rapidly in value, crashing in the early 1920s and taking off until 1928. Nonetheless, if we consider the performance of these firms with capital gains indices weighted by market capitalization, North American equities appreciated sustainedly, specially from 1896 onwards. The same can be said of firms operating in Australia and New Zealand. Capital gains on the stock of European firms were higher than those of UK firms during 1868-1912 and the two years after WWI, never to surpass the appreciation of UK equities in the 1920s.
Dividends on equities were on average higher for core economies than for developing regions. Regressions based on the capital asset pricing model confirm what the graphic analysis demonstrates: African, Asian and Latin American firms had riskier but more profitable equities, whereas British, European and North American firms had lower levels of risk and returns. Per industrial sector, firms involved in the production or extraction of raw materials in Africa, Asia, Latin America and North America had the riskiest and most profitable stocks. Firms in the utilities sector in Asia and North America were the least risky and profitable.
Uncalled or contingent liability, that is, a shareholder’s liability to the firm determined by the difference of the nominal price and the paid-in value of a share was higher in highly-leveraged sectors with meager or inaccessible assets, such as finance and raw materials. Contingent liability tended to be lower for firms in transport and utilities.
In sum, Grossman’s paper reasserts the importance of the City as a global financial intermediary in the peak of the colonial era. Thence we can understand statements such as the following, available in a 1911 issue of The Economist: “London is often more concerned with the course of events in Mexico than with what happens in the Midlands, and more upset by a strike on the Canadian Pacific than by one in the Cambrian collieries.” (Cassis 2007: 84)
- Cassis, Youssef. Capitals of Capital: A History of International Financial Centres, 1780-2005. Cambridge: Cambridge University Press, 2007.
- Grossman, Richard S. “Bloody Foreigners! Overseas Equity on the London Stock Exchange, 1869-1928.” Wesleyan Economic Working Papers 2014-001. Middletown, CT: Wesleyan University, 2014.