the writer is the founder and managing director of capital markets think tank New Financial
In the latest round of self-flagellation over the state of the UK stock market and the City of London, it is worth remembering the words of the American writer HL Mencken that “for every complex problem there is an answer that is clear, simple and wrong”. “.
It’s easy to throw yourself into the stock market and mistakenly argue that it’s becoming a global backwater. And it’s easy to point the finger at who or what is responsible and come up with some easy solutions. The problem with this approach is that the stock market is a symptom of the UK’s economic malaise, not the disease itself.
The underlying challenges facing the UK market lie far beyond the listing regime or the customs of the country’s asset managers obsessed with dividends over growth.
The argument about the decline of the UK market is well rehearsed. Over the last 25 years the number of UK listed companies has almost halved and the number of new issues each year has fallen by around three quarters (although there has been a positive uptick in activity). last year, relative to gross domestic product, companies raised more money in the UK market last year than in the US).
The UK is slipping back on the global stage with an increasingly analogue market and a rule book ill-suited for the digital age, while the US and China run in the distance. Tech stocks make up less than 2 percent of the UK market, compared to nearly 30 percent in the US.
The stock market is not, of course, an end in itself. It is a microcosm of the structural challenges facing the UK economy and the City in the aftermath of Brexit and the pandemic. This is why restarting the UK equity markets is one of the main areas of focus in our report on “The future of UK banking and finance”, published today in collaboration with the US think tank Atlantic Council.
The public securities markets are at the heart of the capital markets in the UK and spill over into all corners of the economy. Fix the stock markets and the rest will start to fall into place.
What is immediately clear is that tightening the regulation is an important starting point, but only a start. The UK needs to go further and faster than the 30 or so government inquiries and reviews on different aspects of banking and finance published in the last two years.
Ultimately, the question is how can we reverse a vicious cycle and reconnect the stock markets and the City with the broader economy and with society. To do that, we must encourage more companies to launch, scale, grow, list and remain in the UK. And we need more commitment from UK investors, both institutional and retail, to provide these companies with the capital they need for the benefit of the UK economy.
The UK may be blessed with a pool of £6 trillion in long-term capital through pensions, insurance and retail investments, but how can we encourage more of these investors to put more than the measly 12 per cent of these assets to work in the UK? stock Exchange?
How can we expand participation in the UK stock market when only 8 per cent of working-age adults directly own individual shares? Last year, 20 per cent of UK adults bought a cash Isa where they are guaranteed to lose money in real terms, but only one in 20 bought a share Isa despite huge tax incentives .
How can we encourage more UK investors to put more money into unlisted growth companies, when 90% of the money raised by UK growth funds comes from outside the UK?
How can we reduce the tax differential between debt and equity financing, which means that equity investment is taxed four times (on a company’s actual profits, capital gains, dividends and stamp duty) while the debt is tax deductible?
How can we bridge the disclosure and governance gap between public and private markets when the UK has had more iterations of its corporate governance code in the last 25 years than it has had prime ministers?
And how can we ensure that in the rush to redesign the post-Brexit rulebook, we build one that is flexible and forward-thinking to embrace the inexorable trends of tokenization and blockchain?
The UK has a once-in-a-generation opportunity to start anew. The best time to address these issues would have been a few decades ago before they took root. The second best moment is now.