New chancellor Rachel Reeves is itching to start the programme of extensive planning reform that is at the heart of Labour’s plan for boosting economic growth. But putting aside the plan to coerce councils to agree to mega building projects, she and new City minister Tulip Siddiq must also urgently address issues that are holding back another key driver of the nation’s economic success: our capital markets.
These are equally deserving of prioritisation for reforms to aid their renewal. A thriving public market creates wealth, jobs, tax revenues and growth capital for companies. It encourages ambition and supports demand for other professional services.
But thriving is not the current state of the London market. It is in a trading volumes, valuations and exodus crisis. Investor interest has been eroded by dismal valuations, political instability, lame economic performance and a poor show by some new listings. Pension funds are a big part of the problem. They have unshackled themselves from domestic equities, preferring instead international equities and bonds. At the same time, stamp duty is a tax that adds to the UK’s general unattractiveness.
The result is that UK Plc is up for sale, at knock-down prices. There are 17 ongoing bids for FTSE 350 companies versus two in the whole of last year, says Peel Hunt. Global soft drinks company Britvic is the latest loss to the stock market (it’s being bought by Carlsberg for £3.3bn). UHY Hacker Young reports that 37 Aim-traded companies were acquired in the year to end June, double the number of the previous year.
With a bit of luck, the money coming shareholders’ way will be recycled back into other London-listed shares, but the array of companies to choose from has dwindled following severe capital outflows, opportunistic takeovers and take-private deals. Takeovers in themselves are not the problem – the problem is the lack of companies, in Peel Hunt’s words,”refilling the hopper”, although EY says IPOs are now finally on the rise.
London still faces the risk of losing one of its biggest listed companies, and top dividend payer to boot. Energy giant Shell has voiced frustration over its undervaluation compared with US peers and its concern that attitudes to fossil-fuel companies under Labour will harden further. New York, which is relishing muscling London to one side, would certainly welcome Shell with open arms, although shareholders would need to strongly endorse such a move. Many others are being encouraged to follow the lead of CRH and switch to a US listing.
The point is that discounted share prices mean every company in London is vulnerable to takeover and/or being tempted away. Jeremy Hunt began the battle to reverse this decline through the Mansion House proposals, and the Financial Conduct Authority (FCA) announced this week that newly overhauled, simplified listing rules will apply from the end of this month. This is an important reform but there are other steps that are needed, too.
The chancellor should establish a stronger link between tax breaks and support for UK companies. Everyone else does and Britain does it occasionally (such as when Peps were created, and the IHT relief on Aim shares). Think tank New Financial estimates that an extra £10bn could be channelled into the stock market if Isa rules were changed to require half of all new investments to be invested in UK equities and the allowance increased to £25,000. This would, it argues, “help rebuild a pool of natural buyers for UK equities and drive a renewed culture of investment”. The consultation on the controversial British Isa ended last month but if Hunt’s proposal is adopted, it is likely to be restricted to an allowance of just £5,000.
So the new Isa on its own won’t be enough to turn the jaded market around, but that doesn’t mean it’s not worth doing. At the same time, tougher conversations with major pension funds are required. Their vast annual fees are supported by generous tax breaks, which significantly increase amounts under management, but by cutting their exposure to domestic equity holdings by around 90 per cent, they have pulled the rug from under the market. Managing their members’ future financial security is a heavy responsibility, but channelling money into domestic shares will not threaten that – as other countries, such as Australia, have shown.
Finally, remove stamp duty on share trading. It is a significant impediment that turns many investors away.
