Saturday, January 26, 2019

Shipping: "Denmark’s Forgotten Stock Market Bubble"

From Global Financial Data:
Global Financial Data has added data on individual stocks from the Copenhagen stock market between 1871 and 1937 to the database. This provides a history of Danish stocks that was previously unavailable. In the midst of putting together this data, we discovered a forgotten stock market bubble of shipping stocks during World War I.

This bubble followed the classic pattern of a dramatic rise followed by a crash, but we have never seen this bubble mentioned in any of the sources we have consulted. In many ways, this was a “rational” bubble since dividends paid by the shipping companies rose dramatically during World War I and then collapsed after the war. The details of this bubble are discussed below.

Data Sources
Global Financial Data went to a number of sources in order to put together 65 years of history on the Danish stock market. Theodor Green published Fonds og Aktier beginning in 1883 and periodically in the years that followed. The books provided price data for Danish stocks as well as shares outstanding and dividend data. In 1893, Danmarks Statistik began providing data on individual stocks and dividends of individual companies in its Statistisk Aarbog, and continued to provide this data until 1937.

Danmarks Statistik began calculating its own index of Danish stock prices after World War I, so collecting and organizing this data enables us to put together an index of Danish stock prices going back 45 years before the Danish index was calculated. Global Financial Data has put together a database of almost 100 companies to create Danish indices that previously did not exist. With this data, GFD has calculated a cap-weighted price index and return index as well as the dividend yield on Danish stocks between 1871 and 1937.
The graph above shows the price and total returns to stocks in Denmark from 1873 to 1937. As is quite obvious, the price of Danish stocks hardly budged during those 60 years. The average price of stocks generally rose between 1878 and 1898, but then, with the exception of the bubble during World War I, declined for the next 40 years. 1 Krone invested in Danish stocks in 1871 grew to 1.3 Krone by 1937, an annual return of 0.4%.

All of the return came in the dividends that were paid to shareholders. Allowing for the reinvestment of dividends, 1 Krone invested in the Danish stock market in 1871 grew to 50 Krone by 1937, an annual return of 6.1%, implying an average dividend yield of 5.7%.
As the chart above shows, Danish stocks paid a dividend that ranged between 4 percent and 6 percent during those 65 years. The exception to this rule was the period during World War I when the dividend yield rose to 8 to 10 percent per annum. The higher yield occurred despite the strong rise in the prices of Danish shipping stocks. Without the reinvestment of dividends, Danish shareholders would have had little to show for their investment.

The Forgotten Bubble
Danish shipping stocks were an important part of the Danish stock market, but overall represented a small portion of the total stock market capitalization. As the chart below shows, transports represented around 10% of the Danish stock market. The two primary sectors on the Copenhagen stock exchange were banks and telecommunications. The banks were represented by Denmark’s four main banks, the Nationalbank, the Privatbank, the Landmandsbank and the Handelbank. The Great Northern Telegraph Co., which listed on the London Stock Exchange, was the largest company in Denmark, representing from 20 to 30 percent of the Danish stock market’s capitalization....MORE