Thatcher, cars, recovery and investment

This has been a week in which the Thatcher period has been much re-visited in the media, and I can remember many of the events described, including the extraordinary re-positioning of UK industry. Many people have commented on the mining industry and the unions, but as a student of economics in the 1970s, I was quite focused on the car industry with the white paper on the future options for the motor car manufacturing required reading as we contemplated what might happen. The general mood was gloomy and without the Thatcher years, frankly British industry would have struggled and retreated very much as it had done for years before her first election victory. For sure the dismantling of protective barriers to the free flow of capital and trade accelerated changes already underway, but it was the combination of greater foreign competition and the UK’s higher cost base that made inevitable the decline of traditional industries managed and manned such that unit production costs exceeded those of competitors.

But whilst this last week, commentators have suggested that the Thatcher years led to the decline of core manufacturing industries, and point to the near wipe out of the ‘mass market’ component of the UK car industry, we should sit up and note that this year the UK car industry is actually expected to make more cars than ever before.

The key issue is that the cars that will be made in Britain are niche vehicles such as 4×4/luxury SUVs and sports cars, rather than the types of mass production cars that were once made on the now demolished Dagenham site in East London.

What’s particularly interesting to reflect upon is that the price of these niche cars – such as Aston Martins and Landrovers – have remained a reasonably stable multiple of average UK house prices (and house prices are arguably the key non-traded goods price that lies at the base of an economy’s cost base) while the prices of mass market cars has clearly declined sharply relative to house prices and hence the economy’s basic production costs. Thus if we look at the price of an Aston Martin DB model relative to the price of an average house in the UK although there is some year to year oscillation in the price that seems correlated with global markets and the company’s own product cycle, in general the price of a Aston Martin has been the equivalent of 1.2 to 1.3 times that of an average house for the last 50 years. In contrast, the price of a Ford Anglia/Escort/Focus relative to house prices has fallen away and therefore little wonder that the manufacture of such vehicles has moved from the UK. It just wouldn’t be profitable to make such vehicles in the UK given the rise in this country’s cost base.

As to what all this has to do with investment, we can offer three key observations.

First, the re-positioning of the UK car industry in a global context represents a useful and generally applicable approach to determining how we should pursue global recovery with focus on competitive strengths rather than relying on central banks to print more money or support currency devaluation. Thus Japan’s attempt to devalue its currency in the hope that it will allow its car makers to produce low end car models profitably once again, despite heavy competition from emerging economies in this sector of the market, will ultimately fail, unless there is a fundamental re-jigging of costs and productivity.

Secondly, the Thatcher period saw and invoked great change. We face changes of even greater magnitude as developed economies work through de-leveraging in the context of global free trade and open markets. Looking ahead, the wise investor will want to think about sustainability and sustainable growth, and to constrain risk, investors will likely want to confine consideration to enterprises that are delivering positive free cash flow returns, such that the risk that balance sheets go horribly wrong is likely limited.

Thirdly, good quality companies that can demonstrate competitive advantage and can evolve to support shareholder value can be identified in most economies and many industries. Where they operate is of much lesser concern than what they do, how they do it, their cost and capital structures and their commitment to value added. This argues for a global and unconstrained approach to stock selection and portfolio construction.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccl