Global Financial Data has added Share Value Indices for over 90 global markets with over a century of data for major countries.  Share value indices allow analysts to determine how the number of shares outstanding has changed over time in order that they can differentiate between changes in price as a source of changes in market capitalization and changes in the number of shares outstanding in market capitalization. Market capitalization is calculated by multiplying the price of shares by the number of shares outstanding.  The number of shares outstanding can increase as a result of a company raising capital by issuing new shares to the public, or by issuing new shares in order to take over a company that was previously private.  Companies that do an initial public offering and sell these shares to the public also increase the number of shares outstanding. The share value index would NOT change if there were a stock split or stock dividend since this would have no impact on the market capitalization of the company.  If one publicly traded company bought out another publicly traded company, no change in the share value index would occur since the shares would simply be transferred from one company to  the other. The share value index would decrease in value if a company went private, removing their shares from the public’s hands, if a company were nationalized by the government, or if the company purchased its outstanding shares, reducing the number of shares in the hand of the public. The share value index is calculated by taking the value of shares outstanding and dividing this by the value of that index.  If the stock market index and the market capitalization double in price, there would be no change in the Share Value Index.  

Share Value Index and Stock Market Index Changes in the 1980s and 1990s

A good example of how the Share Value Index can explain changes in the stock market is illustrated by the dramatic change in the global stock market in the 1980s.  The graph below measures global stock market capitalization as a share of GDP from 1900 to 2018. As Figure 1 illustrates, there was very little change in the ratio of global stock market capitalization to GDP between 1900 and 1980.  From 1980 to 2000, there was dramatic growth in the ratio, peaking in 1999. This was literally a once-in-a-century change in the stock market.  What caused it?  Was it because companies issued more shares to the public, or was it because of a dramatic increase in the price of stocks? Investors wanted to pay more for stocks in the 1980s and were willing to receive a higher proportion of their return in capital gains than in dividends.  The dramatic decrease in personal tax rates under the Reagan administration encouraged the shift from dividends to capital gains.  Figure 4 shows the world dividend yield between 1925 and 2018. The yield had averaged between 3% and 6% between 1925 and 1982 with 4.5% the average yield.  Between 1980 and 2000, the dividend yield moved down steadily and today it averages around 2%, about half of the level between 1925 and 1980. It should be remembered that since 1981, yields on government bonds have dropped throughout the world.  During the past few months, markets have edged into a bear market as interest rates on U.S. Government bonds pushed above 3%, levels that would have led to a bull market 20 years ago. So what changed investors’ perceptions of risk and their valuation models of the market? The 1980s and 1990s saw the world move from the closed financial markets that had prevailed in the world between the Great Reversal of 1914 and the 1970s and into a Globalized world that had prevailed before World War I undid the globalization of the 1800s.  If you combine this with lower yields on government bonds, the privatization of nationalized corporations, the growth in stock markets in former Communist countries, lower interest rates and lower tax rates, you have a once-in-a-lifetime shift in global financial markets. It may be fears of a second Great Reversal, in which governments reject globalization in favor of global competition through political intervention that has driven markets down during the past few months.  Unfortunately, if this is the case, a drop back to the levels of 2000 and 2008 remains a possibility. Let us hope that global leaders can see the folly of their actions and reverse course before it is too late.

  Global Financial Data has the most extensive database on historical stocks available anywhere in the world.  GFD has collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War I, and many companies in emerging markets listed their shares on the London Stock Exchange before a stock exchange even existed in their country. After World War I, many foreign companies listed on the New York Stock Exchange.  Using data from London and New York, we can calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were calculated. This is one in a series of articles about those countries. Havana did have a stock exchange before Castro overthrew the Batista government and nationalized all Cuban corporations without compensation. Today, of course, there is no stock market in Havana, although the building that housed the Havana Stock Exchange until 1959 still exists in downtown Havana and is pictured above.  I remember admiring the building when I walked by it on my visit to Cuba in 2016, but unfortunately, the stock exchange itself no longer exists.  Given the fact that no public corporations have existed in Cuba for almost 60 years, is it possible to recreate an index of Cuban stocks based upon shares that traded in London and New York?  The answer is yes.  

Cuban Capitalism Before the Revolution

Global Financial Data has information on 7 Cuban companies that traded in London before 1932 and 20 companies that traded in New York between 1905 and 1961. Before 1870, two Cuban mining companies listed in London, El Compañia Consolidada de Minas del Cobre (The Cobre Mining Co.) (1838-1867) and the Santiago de Cuba Mine (1849-1859).  The Cobre mine was located at the southern tip of Cuba near Guantanamo. It was the oldest mine in the new world, having been founded in 1544.  In the 1830s, a British entrepreneur bought the abandoned mine and brought Cornish miners and mechanics to get copper from the mine. The Cobre was a successful company for almost 30 years with a capitalization of about $5,000,000 in 1864. At its height, the mine was producing 67,000 tons of copper per year, but operations were suspended in 1869 when the quality of the ore declined, and the mine went bankrupt in 1869 causing a complete loss of capital to investors. The next phase in Cuban capitalism was an attempt to provide transportation to the island by building railroads and warehouses so the sugar and other crops produced in Cuba could be exported to the rest of the world.  Cuba remained under the control of the Spanish until the Spanish-American war in 1898 in which America defeated Spain and exerted its influence over the island for the next 60 years. Among the Cuban companies that listed in London were the Cuba Submarine Telegraph Ltd. (1870-1928) and Western Railway of Havana (1895-1913).  After the Spanish-American war, a number of new companies were established in London, including the Cuban Central Railroad (1901-1918), and the United Railways of Havana and the Regla Warehouses (1906-1932).  The world’s railroads were funded through London, so it should be no surprise that London funded Cuba’s railroads as well. Most of the companies that listed in New York produced sugar or tobacco, or provided services to the population of Havana.  Of the 20 Cuban companies that listed in New York, eleven were sugar companies and two were tobacco companies (the Cuban Tobacco Co. and the Havana Tobacco Co.).  The remaining stocks included the Banco Nacional de Cuba, The Cuba Co., which ran both the Consolidated Railroads of Cuba and the Compañia Cuban which owned about 300,000 acres of land on which it raised sugar, and the Havana Electric Railway Light and Power Corp. which consolidated the Havana Electric Railway with the Compañia de Gas y Electricidad de Habana, which had a perpetual gas and electricity franchise in Havana.   Fulgencio Batista was elected President of Cuba in 1940 and became the dictator of Cuba after a coup in 1952.  He remained in power until 1959 when Fidel Castro and his rebels seized power in Cuba.  The government nationalized all corporations in Cuba without compensation and American investors lost their entire investment.  The United States government still demands compensation for the companies that were nationalized while Cuba demands compensation for the cost of the embargo the United States has imposed on Cuba.  Neither side seems willing to compromise.  

Returns to Cuban Stocks

What differentiates the return on Cuban stocks from shares in other countries is the three strikes that have been thrown at investors during its history.  The Cobre Mining Co. was abandoned in 1869 causing a complete loss to investors.  A second collapse in Cuban share prices occurred in the 1920s when the decline in the price of sugar and in the Cuban economy caused Cuban stocks to lose over 90% of their value. The third loss occurred when Fidel Castro overthrew the Batista government and nationalized Cuban corporations generating a complete loss to shareholders. Up until nationalization, Cuban stocks had provided modest returns.  $1 invested in Cuban stocks in 1870 would have yielded $0.50 by 1961, an annual loss of 0.75%, but with reinvested dividends, the $1 invested in Cuban stocks in 1870 would have returned $48.75 providing an annual return of 4.36% over the 91-year period and an annual dividend yield of 5.15%.  Without reinvesting dividends, shareholders would have had no return to speak of.  Nevertheless, when the government nationalized all the corporations in Cuba, investors lost everything. It should be remembered that Cuba never had a growth industry.  Its main sector was agriculture, primarily sugar and tobacco, and other companies provided the infrastructure to ship Cuban goods abroad.  Tourism from the United States played an important role in the economy until 1959, but it was hardly a growth industry.  During the 2000s, Cuba’s revenues from tourism remained constant at about $2.5 billion.  Cuba’s exports are about $1 billion per year, but imports are over $5 billion. So was Cuba a good investment?  No. Cuban investors lost their money three times in the past. Cuba remains opposed to almost any expansion in the private sector.  Citizens are restricted almost exclusively to running a small restaurant, a bed and breakfast or driving at taxi. When you look at the three times that investors lost virtually every penny they invested in Cuba in the 1860s, 1930s and 1960s, one can almost be grateful to Castro for keeping investors out of Cuba so they wouldn’t get wiped out a fourth time.

  Although few people realize it, the Great Depression hit Europe when the Creditanstalt bank of Vienna collapsed in May 1931 and began a domino effect that spread to the rest of Europe. The collapse of the Creditanstalt is seen as the trigger to the great deflationary spiral in Europe between 1931 and 1933. The reason for the impact of the Creditanstalt on Germany and the rest of Europe was that it not only was the largest bank in Austria, but it was larger than all the rest of the banks in Austria put together. The bank had ties to the rest of Europe and the collapse of the Creditanstalt led to a Europe-wide crisis.  

The Growth of the Creditanstalt

The Creditanstalt bank was founded in 1855 as the Österreichische Credit-Anstalt für Handel und Gewerbe and was associated with the Rothschilds from its beginning.  When the Austro-Hungarian Empire collapsed at the end of World War I, the Creditanstalt continued to offer commercial, investment and savings to customers in the Successor States to the Empire as well as Amsterdam, Berlin, Bucharest, Paris and Sofia.  Its shares were traded on eleven exchanges, including New York. The Creditanstalt became the largest bank in Austria through a series of forced mergers.  The Bodencreditanstalt took over the bankrupt Union Bank and the Verkehrbank in 1927, and the Creditanstalt took over the Bodencreditanstalt in 1927 with 90 million schillings of capital, but 140 million schillings of accumulated losses. The Bodencreditanstalt had already absorbed a multitude of small- and medium-sized banks and in 1927 was on the brink of failure.  The Bodencreditanstalt relied upon the discount window of the Austrian National Bank to survive, but when the Austrian National Bank closed its discount window, an acquisition by the Creditanstalt was arranged by the government creating a bank that was larger than the rest of the Austrian banks put together.  Unfortunately, this only delayed the inevitable collapse, concentrating the accumulated losses of Austrian industry in a single superbank. After the hyperinflation of 1923-1924, Austrian banks failed to restore adequate capital endowments so that any ventures of its banks were increasingly debt financed.  In 1925, Creditanstalt’s equity was only 15% of what it had been in 1914 and its debt/equity ratio rose from 3.64 in 1913 to 5.68 at the end of 1924 and to 9.44 at the end of 1930. Part of the increase in the size of the bank came from loans which the Creditanstalt made to businesses in the successor states. The Creditanstalt did not want to restrict its operations to Austria and ignore the rest of the former Austro-Hungarian Empire. The Creditanstalt borrowed money, primarily from Great Britain and the United States, but this was only on a short-term basis and any failure to renew these loans would lead to the demise of the bank.  Acquisition of the Bodencreditanstalt added to the bank’s problems, and when the bank’s performance began to falter in 1930, the Creditanstalt bought up its own shares to keep the price of its stock from falling. On May 11, 1931, the Creditanstalt announced that it had lost more than half of its capital, a criterion under Austrian law by which a bank was declared failed.  The bank’s losses amounted to 140 million schillings, equal to 85% of its equity. Not only was the Creditanstalt the biggest bank in Austria, but it was bigger than all the other Austrian banks put together. The Creditanstalt’s balance sheet was the size of the government’s expenditures and 70% of Austria’s corporations did business with the Creditanstalt. It had business interests in eleven banks and forty industrial enterprises of the Successor States and counted 130 domestic and foreign banks among its creditors. Over 50% of its stock was foreign held.  Talk about too big to fail! The next day, the Austrian government announced a program to rescue the bank with 160 million schillings, 100 million from the Austrian government, 30 million from the National Bank and 30 million from the Rothschilds in Amsterdam.  The announcement of the bank’s failure led to a concern that other Austrian banks might be in danger of failure.  If the largest bank in Austria were on the verge of failure, could other Austrian banks be far behind? This led to a run on Austrian banks and a massive increase in the money in circulation, which rose from 305 million schillings on May 7, 1931 to 1,141 million on May 31 as Austrians pulled their money out of their banks. Austria’s bailout failed to stop the bleeding and on May 29, the BIS arranged an additional credit of 100 million schillings.  The loan had been delayed by the French who objected to Austrian participation in the Zollunion with Germany. The 100 million schilling credit was exhausted in five days and the Austrian National Bank sought a private 150 million schilling loan from abroad. People in Austria were afraid that the inflation of 1924 would return and both the banks and the Austrian currency would collapse. They began converting their schillings into foreign currency to avoid the impact of a devaluation. Austria’s foreign reserves declined from 850 million schillings in May to 300 million schillings by the end of the year. The announcement of the losses of the bank raised questions about its solvency, but the run on the bank that followed created problems of illiquidity. The gradual decline in the price of Creditanstalt shares in Vienna and their collapse in May is seen below.   Total losses of the Creditanstalt came to 828 million schillings of which 600 million were losses on bad loans.  The Austrian government guaranteed all the losses of the Creditanstalt on June 27, 1931 but this meant guaranteeing 1,200 million schillings of bank liabilities when the federal budget was 1,800 million schillings. In August, the League of Nations arranged a 250 million schilling loan from seven governments which covered the losses of the Creditanstalt, but the Austrian schilling continued to hemorrhage foreign reserves.  On October 9, 1931 the Austrian government introduced exchange controls on the Austrian schilling. The run on Austrian banks triggered runs on Hungarian, Czech, Romanian, Polish and German banks. On June 19, 1931, President Hoover declared that there should be a one-year moratorium on the payment of war debts and reparations.  The Danatbank failed in Germany on July 13 leading to a bank holiday on July 14 and 15 in Germany and the closure of the Berlin Stock Exchange until a brief reopening in September. The Reichsbank guaranteed the deposits of all of the banks except for the Danatbank and the banks reopened later in July. The Germans had learned from Austria’s failure to provide a lender of last resort to stem the tide.  The Berlin Stock Exchanged closed again in September and remained closed until April 1932 when the stock exchange reopened. It took until January 1933 for the Creditanstalt crisis to be finally resolved when the Austrian government took over the bank and issued preferred stock to foreign creditors. The government provided annuities for claims against the bank.  The total losses of the bank amounted to 1,070 million schillings, 7 times the original losses, with the Austrian National Bank bearing the burden of 700 million schillings in losses. On May 5, 1934, the Austrian schilling was devalued by 28%. As the chart of the Austrian Stock Exchange shows below, the devaluation of the schilling stopped the decline in Austrian shares.    

The Great Depression Begins in Europe

The crisis proceeded to Great Britain which went off the Gold Standard on September 21, 1931 after its gold reserves shrank from £200 million to £5 million.  Twenty-five countries soon followed in Britain’s footsteps, depreciating their currency against the U.S. Dollar or leaving the gold standard.  By the end of 1931, the Depression was global.  The United States stayed on the Gold Standard until April 1933 when President Roosevelt took the United States off the Gold Standard.  By 1933, the globalized financial system that had prevailed until 1914 was broken and national economies existed almost independently of each other.  It would take another 50 years for the world to recover and return to a globalized economy. It wasn’t so much that the collapse of the Creditanstalt caused the collapse of the global financial economy, but it set in motion a chain of events that revealed the poor condition of European economies and the fragility of the financial system which quickly fell apart and led to the beginning of the Global Depression of 1931-1933.  The principal problem was that no lender of last resort, either domestic or international, stepped in when the collapse of the Creditanstalt first occurred to guarantee the bank’s liabilities and stop the rot from spreading. The fear of another domino collapse of the global economy occurred in 2008 when Lehman Brothers went bankrupt and there was a fear that the larger banks would withdraw credits from General Electric, McDonalds and other global corporations leading to a second collapse in the global financial system.  Luckily, Bernanke, Paulson and Geithner remembered how the lack of a lender of last resort in the Creditanstalt collapse of 1931 had precipitated the failure of the global financial system in the 1930s.  They made sure the collapse of Lehman didn’t create similar problems and prevented a repeat of the Global Deflation of 1931-1933.

Global Financial Data has the most extensive database on historical stocks available anywhere in the world.  GFD has collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War II, and many companies in emerging markets listed their shares on the London Stock Exchange before a stock exchange even existed in that country. After World War I, many companies listed on the New York Stock Exchange.  Using data from London and New York, we can calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were calculated. This is one in a series of articles about those countries.  

Chinese Stocks Before World War II

Shares traded in Shanghai before any trading of Chinese shares occurred in London.  The Shanghai Stock Exchange began trading in 1866 and included several banks and other companies. By the 1930s, Shanghai was the financial center of China with trading occurring in stocks, debentures, government bonds and futures.  In 1937, Japan occupied Shanghai, and on December 8, 1941, share trading in Shanghai was halted by the Japanese.  Share trading resumed in 1946, but was discontinued when the Communists seized power in 1949.  The stock market remained closed until November 1990 when the Shanghai Stock Exchange reopened.  Today, the Shanghai Stock Exchange is one of the largest in the world with $4 trillion listed on the Shanghai stock exchange. Wenzhong Fan has put together an annual index of stocks listed on the Shanghai Stock Exchange using data from The North China Herald that stretches from 1871 until 1940. The market index he created using this data is illustrated in Figure 1 above.  It would appear that stocks did very well after World War I, with the index rising in price to almost 20,000 providing an annual return between 1871 and 1940 of 7.9%, but this was primarily because of the inflation that ravaged China during the 1930s.  If the values are converted into USD as is illustrated in Figure 2 below, the returns are still positive, but the increases are much more moderate. The index provided an annual return of 2.35% between 1871 and 1940, not 7.9%. Although Fan’s index is based upon a larger sample of stocks than was available on the London Stock Exchange, the data are annual rather than monthly so GFD’s China indices can provide detail that Fan’s indices cannot. It is interesting looking at the sectors that are covered by the stocks that were listed in Shanghai to see both which sectors are included and which are excluded.  The major omission is railroads, which the Europeans wanted to build to exploit Chinese resources and the isolationist Chinese mandarins opposed. Between 1881 and 1895 only 18 miles of railways were built per year in China, but when the Chinese government realized how railroads could help the government put down the Boxer Rebellion between 1899 and 1901, a railway boom ensued, though one managed by the government for military purposes. By 1911, 6,000 miles of railway had been laid. However, transport stocks were not completely ignored in China. There are a large number of shipping, canal and dock companies that traded on the Shanghai Stock Exchange.  One unexpectedly large sector in Shanghai was Plantations since there were numerous rubber estates located around Shanghai. There were also a large number of finance companies, including banks, insurance and real estate companies as well as utilities, but no other sectors stand out as representing a large number of companies in China.   The Shanghai Stock Exchange was modest in size.  Starting off at $23 million in market capitalization in 1871, the market increased in size to $1.7 billion at its peak in 1925, but declined in size to $235 million upon its closure in 1941. This amount was just a fraction of China’s GDP because key sectors, such as railroads, were not publicly traded, and the companies that were publicly traded only existed in the main cities such as Shanghai and Hong Kong where foreigners were allowed to live and trade.  

Shanghai Stocks Listed in London

The data from London only cover the period from 1896 until 1930.  During that period of time, GFD’s index of Chinese shares, illustrated in Figure 3 below, rose from 100 to 158 on a price basis providing an annual increase of 1.36% and from 100 to 634 on a return basis providing an annual return of 5.58% and a dividend yield of 4.16%.  This compares favorably with Fan’s return of 4.54% during the same period of time. There was never a grass roots effort to develop the economy through capital markets or to integrate the Chinese economy with the rest of the world. The companies that were listed in London represented a handful of companies that tried to develop Chinese resources, not Chinese entrepreneurs trying to raise capital for domestic production.  It should be noted that by comparison, the market cap of Shanghai shares listed in London was only $35 million in 1925, but Hong Kong shares listed in London, mainly the Hong Kong and Shanghai Bank (HKSB), was $110 million.  Because of China’s isolation, British capital never played an important role in China outside of Hong Kong. China defaulted on most of its sterling loans in 1924 and 1925.  The market recovered in the 1930s, rising above par and peaking in 1936, when an effort was made by China to rehabilitate these loans in 1936 and 1937.  However, the invasion of China by Japan in 1937 when the Japanese captured both Shanghai and Nanjing drove the price of Chinese bonds down since investors knew that little money would be available for paying coupons.  Chinese bonds rallied back between 1939 and 1945 as investors regained faith that the Allies would help China remove the Japanese from the country and enable China to deal with the default on their government bonds, but the civil war in China after World War II put paid to any chance investors were going to receive payment on the coupons, much less have the bonds redeemed.  

Hong Kong Stocks Listed in London

The Hong Kong Stock Exchange was set up in 1891 when the Association of Stock Brokers in Hong Kong was established. It was renamed the Hong Kong Stock Exchange in 1914. The Hong Kong Stockbrokers Association was founded in 1921 and merged with the Hong Kong Stock Exchange in 1947.  Three new exchanges were founded between 1969 and 1972 and they all merged into a single exchange in 1986. The Hang Seng Index was introduced on July 31, 1964 and is still the benchmark for Hong Kong 54 years later, but what happened to Hong Kong Stocks before 1964? The GFD Hong Kong index included only two stocks in 1964, the Hong Kong and Shanghai Bank and the Indo-China Steam Navigation Co., but HKSB listed on the London Stock Exchange from 1868 until the present providing an incomparable set of data to analyze.   The bank stock’s performance between 1868 and 1969 is shown below in Figure 6 which illustrates over a century of stock prices in Hong Kong.  The expected peaks and declines can be easily picked out. The decline in the early 1890s was driven by the banking crisis in Hong Kong which occurred in 1890; however, the 1895 Treaty of Shimoneseki opened up the Chinese market to foreign investors and the stock market boomed for the next 10 years.  There was a rubber boom between 1909 and 1910 driving prices up, but the Revolution of 1911 which overthrew the Ch’ing Dynasty had little overall impact on the stock market. There was cotton speculation in 1919 and a second rubber boom in 1925, both of which are illustrated by peaks in the stock market index. However, in 1931, Japan invaded northern China, seized Shanghai in 1937, and the Shanghai Stock Exchange closed on December 5, 1941. The index performed relatively well during the 1940s, but collapsed in 1949 after the Communists took over China.  Once the threat of the Communists taking over Hong Kong receded, the index rose steadily until the 1960s when Hong Kong became the entrepôt for southern China. The London Stock Exchange listed shares in Hong Kong companies such as the Hong Kong and Shanghai Banking Corporation (1868-), China Submarine Telegraph Ltd. (1870-1873), Hong Kong and China Gas Co. (1865-1920) and Indo-China Steam Navigation Co. (1940-1952, 1956-1969).  Data on these four shares was used to put together the index provided in Figure 6. The index of Hong Kong Stocks rose from 100 in December 1868 to 680 in December 1968, providing an annual price increase over those 100 years of 1.94%.  The return index rose from 1 to 1300 during the same period of time, providing an annual return of 7.43% and an annual dividend yield of 5.38% over those 100 years.  Granted, the index primarily keeps track of one stock, the Hong Kong and Shanghai Banking Corp., but the bank did provide a consistent level of return to its shareholders.  If you compare the performance of Hong Kong stocks between 1896 and 1930 with those in Shanghai, the Hong Kong Shares returned 2.68% per annum and 8.72% after including dividends, clearly superior to the 5.58% total return that Shanghai stocks provided.  

What if?

It is unfortunate that the number of Chinese stocks that listed in London is so limited, but it does provide us with insight into the performance of shares that would otherwise be unavailable.  One alternative would be to use the Far Eastern Economic Review to create a broad index of stocks between the end of World War II and the creation of the Hang Seng Index in 1964. Of course, the ultimate speculation, which can never be answered, is what might have happened if the Communists had never seized power in 1949.  The Taiwan Stock Exchange began operating on February 9, 1962 and helped Taiwan to establish its technological prowess in semiconductors and other areas of technology.  What if the Shanghai Stock Exchange had never closed in 1949? How different would China be today if the Kuomintang had defeated the Communists? Unfortunately, we shall never know.