UK’S failure to invest in tech spells disaster for savers

Britain can no longer afford to ignore the benefits of the intangible economy and its contribution to growth

Over the past 40 years, the world’s economy has undergone a subtle but significant change. Unfortunately, British savers are missing out on the full benefits of this revolution, and it couldn’t come at a worse time as people struggle to cope with soaring household energy bills and inflation levels at their highest since the 1980s.

Forty years ago, we didn’t have the world wide web, smart phones, laptop computers, or digital TVS. Most of the world’s largest businesses invested in physical assets – machines, buildings, vehicles, and computers.

Today, they’re mainly investing in things you can’t see or touch, such as research and development, brands, product design, software or relationships with customers or suppliers. In the years since the 1980s, we have seen the global rise of these intangibles, which have become critical to the world’s biggest economies. The most successful businesses worldwide in 2022 are those with the most valuable intangible assets – Alphabet, Apple, Microsoft, Meta, Alibaba, Tencent, Visa, TSMC, Disney and others. But the UK has a problem with this intangible economy, and it is costing us dear.

Until the global financial crisis, intangible investment in the UK was growing at 3.2pc per year. In the US, it was growing by 4.4pc. After the crisis, while investment in intangible assets has remained at 4.4pc in the US, in the UK, it has fallen to 2.3pc a year.

Had we continued investing at the levels we were until 2007, when the GFC began, our GDP would be more than £59bn higher each year.

Furthermore, if we had invested as much as the US, we would have created an additional £5,107 of economic output for each household every year. This would have been more than enough to make up for the expected increase in energy bills.

Looked at another way, our failure to invest in the intangible economy is 1.4 times as big a cost to households as the energy shock – and we suffer this loss every year.

Part of the reason why the UK is underinvesting in intangible assets lies in our financial system. Most British businesses are reliant on banks for external finance, and banks tend to be wary of lending to businesses whose assets are mostly intangible. Yet while the global amount of intangible capital – money invested in intangible assets across businesses – has grown relative to the rest of the global economy, when it comes to the UK’S largest companies, the same trend isn’t visible.

This runs counter to the success of several UK businesses based on intangible assets. For instance, in 2015, Games Workshop was a respectable but unremarkable company with a portfolio of intangible assets – the imaginary worlds and brands associated with its figurines and war games. Over the next five years, it worked closely with customers to build brand loyalty and develop the games, with sales in the UK and overseas growing rapidly, the value of the company’s intangible assets appreciating too. From 2015 to 2020, Games Workshop was the best performing UK publicly traded company, its stock price growing by over 1,600pc.

Nevertheless, most of the companies in the FTSE 100 stock market index have been putting about 15pc of their investments into intangible assets for the last decade. Yet if we look at the leading US stock market indices, large intangibleintensive tech platforms have grown hugely in importance over the same period. The UK’S equivalents, such as Autonomy, Arm, Deepmind or Darktrace, have typically been acquired before they could become mainstays of UK indices. This means that retail (private) investors who have decided to track the FTSE 100 have had less exposure to high-growth companies with significant intangible assets than they would have in a broader global fund.

Even those fund managers who manage their funds actively seem to be underweight in companies investing significantly in intangible assets, particularly those focused on value or income. This has an impact on overall performance.

From 2005 to 2020, those funds with the most exposure to intangible assets dramatically outperformed funds invested in companies with relatively low intangible investments. Those who had invested in companies with high levels of intangible investments saw annual returns growing by about 10.2pc, compared with 3.8pc for those with less investment in these assets. The last six months, in which tech has done badly and resource stocks well, has proved an exception. But it’s the long term that matters.

Many UK savers and pensioners will have taken a direct hit from the UK’S inability to keep up with the cutting edge of the intangible economy: their portfolios and pension pots will have grown more slowly, and they will have missed out on much of the growth other investors have enjoyed.

Research suggests the move towards investing in intangible assets began before the invention of the internet, even of the semiconductor.

As energy prices continue to rise, the time to think long term about growth and investment has come. The UK cannot afford to miss out on the opportunities created by the intangible revolution any longer.

‘Our failure to invest is 1.4 times as big a cost to households as the energy shock’