The UK Stock Market Exodus – How does it impact us?
London Stock Exchange leaving us short-changed? Account Executive Luke Hall delves into why the UK stock market’s present decline has ramifications for us all.
By Luke Hall on Tuesday, 12 September 2023
Last month at Mansion House, Chancellor Jeremy Hunt unveiled a series of reforms he hopes will transform London into the ‘global capital for capital’.
Recent months have revealed three worrying trends for the London Stock Exchange (LSE): a dearth of new flotations in London, a rise in private equity firms acquiring listed companies at a discount, and, perhaps most concerningly, a growing tendency for high-potential companies to favour foreign exchanges for their listings.
Not only is this bad news for the LSE but it also has implications for the wider economy. We’ll come back to what a poor stock market means for us all but first look at the LSE’s history and the driving forces behind its relative decline.
The LSE was founded in 1773 by a group of city stockbrokers who were trading in local coffee houses. Before its suspension at the outbreak of the First World War in 1914, the exchange was the world’s biggest and a large contributor to London’s status as the financial capital of the world.
Over the years the LSE ebbed and flowed with the times, experiencing high and low points, numerous regulatory changes, mergers and even an IRA bombing in the 90s.
Activity peaked in 2007 before the global financial crash, when average daily traded volume of the FTSE all-share index sat at £15 billion and the total capitalisation of London-listed reached a pinnacle of £2.8 trillion. Today however, these figures are significantly lower, sitting at £3.7 billion and £2.3 trillion respectively. The LSE is now only the eighth biggest in the world having been outmuscled by its counterparts in the US, China, Hong Kong, Japan, India, and France.
Why the relative decline? As with all complex economic matters, the answer is multifaceted. Many point to the political and economic instability caused by Brexit and last year’s mini-budget as reasons and, whilst these points do come with merit, there are deeper and longer-standing forces at play. Chief among these forces are capital pools and sector trends.
The US, for example, has a notably larger capital pool than the UK, which draws in prospective companies seeking to achieve the highest valuations they can. When it comes to sector trends, whilst the US has become a hotbed for up-and-coming technology firms and France has achieved a similar feat in the arenas of luxury and consumer goods, the UK has not managed to establish itself in the same manner.
But in the midst of a cost-of-living crisis, why should we care about AstraZeneca’s Q2 results or where UK based rising enterprises such as microchip-designers, Arm, decide to list?
As I alluded to, the strength of the LSE does have implications for people even if they do not work for or, directly invest in, these companies. Pension funds, for example, often invest in UK equities and a lacklustre stock market can directly harm all our retirement incomes. A second consideration is if the UK appears less attractive to international investors, companies may find themselves with suboptimal capital to expand their workforce and produce the products integral to our daily lives.
Talking about problems is easy but providing solutions is a harder task. In an interview with City A.M at the start of the month, Julia Hogget, the CEO of the LSE likened the reforms needed to a five fingered glove comprised of primary and secondary market reform, deeper investment research, increased flow of domestic risk capital in the UK, better corporate governance and more abstractly, improving the overarching climate in which companies are scaled up.
On a policy level, some have suggested more dramatic pension reform which would encourage large pension funds to allocate more of their capital to UK listed equities. This tactic might work in theory but does come at some cost to the many millions who save into pension funds every year. Such funds are mandated to work in the best interest of these savers who will suddenly find a greater portion of their retirement money allocated into riskier assets which simply may not generate the kind of returns they would otherwise. To tackle the issue of the UKs relatively small capital pool, the government could instead look to grow the investing base from the bottom up. Simple measures such as slashing trading duties, as Chinas has just done this week, lifting the annual exempt amount on Capital Gains tax and raising the ISA contribution limit would go some way in showing intent on this matter.
Sources:
https://www.ft.com/content/ca6e6558-c55a-478b-a35d-81958d0c2890
https://www.investorschronicle.co.uk/news/2023/07/10/hunt-announces-shake-up-to-listing-rules/
https://www.gov.uk/government/speeches/chancellor-jeremy-hunts-mansion-house-speech
https://www.ft.com/content/f7de6a43-4665-4403-90a4-75df8ee7070a
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