Broadly speaking, the London stock market hasn’t covered itself in glory this year. Whatever frame of reference you choose – FTSE 100, mid caps, All-Share, small caps - all have nudged into the red in the year to date in simple share price terms, with Aim’s performance the worst of the lot. Compare that to the S&P 500 which, largely thanks to the popularity of the Magnificent Seven, has delivered a gain of around 15 per cent this year.
Unquestionably, parts of the US market have been a disappointment too, and a roaring bull market, while aiding effortless portfolio growth, isn’t a prerequisite for making decent returns, unless for some reason you are fully invested in passive funds or have a very short-term horizon.
Nevertheless, the lack of a plot twist in this years-old story of the US coming out on top while London limps along with minimal IPO activity, coupled with the steady flow of companies announcing a delisting or reporting they are under shareholder pressure to do so – as Tui did this week – reinforces the general aura of decline over the domestic market.
Jeremy Hunt, who in his 14 months as chancellor has pushed for changes that could inject new momentum into London’s shares, provoked disappointment and accusations that he had dropped the ball on this issue in the Autumn Statement. He failed to deliver a UK-only extension to Isas, to commit to a research hub to put London’s companies in the spotlight or to protect by some means our early-stage technology and healthcare sectors.
Patience is wearing thin. It is perverse, says Peel Hunt, that Isa investors receive a tax break which is then invested overseas, and it suggests that a proportion of the Sipp allowance could be mandated to be invested in UK-listed assets in return for the associated tax benefits. CGT should not be applied to small- and mid-cap gains.
Panmure Gordon’s chief economist, Simon French, argues that given the importance of financial services to the UK economy (it accounts for 8 per cent) and tax revenues (12 per cent), more needs to be done, starting with encouraging the UK’s pensions industry to reverse flows out of UK equity markets. “Staggeringly,” he comments, “there have been net outflows for 75 of the last 90 months – totalling more than £43bn.”
Panmure agrees the government should consider returning the tax advantages of saving in a stocks and shares Isa to its original form – eligibility was once reserved for UK-listed shares – and it recommends putting a floor under the amount of UK equity ownership held by public sector pension schemes.
The Capital Markets Industry Taskforce (CMIT), set up by the stock exchange last year, says Britain’s failure to invest in itself is the crux of the problem. In a recent letter to the chancellor, it pointed out that not only have retail investing levels declined but the fall in pension investment in the UK markets has been even more pronounced. UK shares have dropped from 53 per cent of their assets to just 6 per cent over the past 25 years.
As CMIT points out, Britain’s largest defined contribution workplace pension by members (Nest), has less than 0.5 per cent of disclosed holdings in its top 100 investments in UK-listed equities. This lack of support from British funds stands in stark contrast to other nations. CMIT found that relative to the size of their domestic equity markets, French pension schemes are 889 per cent overweight their home market; Australia’s 2,737 per cent overweight, Canada’s 247 per cent. Meanwhile, Britain’s three largest pensions schemes are 40 per cent underweight relative to the size of the UK market.
Rule changes and carrots are not the only thing that will deliver a flow of buyers and capital to London. An easing of the tough macro climate for companies and consumers, and returns on cash becoming less attractive, will help, too. Crucially, more investors are recognising that fundamentally the UK is not a basket case. It is conquering inflation, has avoided a recession even with the Brexit complication, and monetary loosening rather than further tightening is around the corner. As Peder Beck-Friis, economist at Pimco, wrote recently in the Financial Times, “the UK no longer stands out” for all the wrong reasons.
But if Hunt can help pull off transformational flows of money into the London market, the boost could be electric. French says one large US investor in UK companies told him: “Get this right and UK shares could easily rally 30 to 40 per cent”.
