We badly need to restore national pride in our stock market
Some of the UK’s most exciting prospects will get the chance to bend the ear of the Chancellor at his Dorneywood retreat tomorrow on the thorny topic of how to revive our struggling equity markets. They shouldn’t pass up the opportunity.
Jeremy Hunt has invited leading fintech and biotech firms to the Buckinghamshire summit to discuss how capital markets can support high-growth companies. Why the urgency? Despite the FTSE100 hitting a new all-time high, we are still underperforming the US, and we are still losing funds from the UK. More needs to be done to grasp the opportunity to restore the UK to its position as a leading financial centre, and one where the most exciting companies ‘want’ to list.
We, and others, have been driving forward a significant reform agenda to do just that, beginning with the Lord Hill review in 2020. We are making progress towards a simplified, more competitive single listing regime to help IPOs, removing red tape and revitalizing the research environment to encourage retail investors.
All these efforts are because of the vital role a thriving domestic equity market plays. It’s about channeling money from savers to the companies who need it, to help them create jobs and wealth for the good of the economy. With equity, companies get an incredibly flexible source of funding: it’s permanent and allows businesses to plan for the long term. You can reward staff with it, and it is open to a broad spectrum of investors. The big investors like the pension funds providing the money get their return, which all goes towards funding our collective retirements.
But something is wrong. Those pension funds are shunning our UK stock market. Compared with 25 years ago, our UK pension funds are pulling out of UK equities as portfolio managers put their money elsewhere in the world instead. The weighting of UK shares has dropped from 44% to just 4% over that time. Our money managers are experts at creating global portfolios for our savers, but other countries don’t seem to be doing the same. We are very good at exporting our capital, but we’re not getting the benefits of other countries sending their own funds in our direction.
There’s an attitude problem too. Pension funds overseas shout more about what they’re doing and how they’re helping their own countries. Take Australian Super: it’s significantly over-indexed in Australian shares and its latest annual report shouts from the rooftops about its contribution to the Australian economy. As a matter of pride, it says that its investments created 12,000 jobs in 2022, and could add A$200bn-plus to Australian GDP over the next 30 years. Contrast that with Nest, the UK’s largest workplace pension scheme. In their annual report there’s no visibility on its investment in the UK. It’s silent on its contribution to UK society and the economy.
The Chancellor has committed to introduce a reporting regime for pension schemes to disclose their allocations to UK equities, and not before time. If other countries are doing it there is no reason why we can’t do the same. It’s the same with the UK ISA, which we strongly support. It’s baffling to me why we offer ISA tax breaks for people to invest in overseas companies. What we badly need to do is restore a sense of national pride and investment in our domestic economy.
This is not about flag-waving, more like economic common sense. There’s no shortage of great companies that could list here. But UK investors are great at the early-stage seed and venture funding, and less good at what comes next according to Ron Kalifa’s 2021 review. The majority of big funding rounds are led by foreign investors, and Kalifa found that fintech entrepreneurs were far more likely to sell to a foreign buyer than take their business to IPO. That’s why the Mansion House Compact, getting pension funds to invest 5% of their funds in unlisted growth companies, is also vital.
So Dorneywood is a terrific opportunity to impress upon companies the strength and breadth of the reform agenda, and how incentives to both supply and demand can reposition the UK as the market of choice for growth companies.
Let’s not forget, the stakes are unbelievably high. You can’t be a global financial centre without a thriving domestic market: our financial services sector brings in £100 billion of taxes a year and supports 1.1 million jobs. As he addresses those businesses on Thursday – one of whom might end up being another Facebook or Google – he should keep those numbers firmly in mind.
Steven Fine is the chief executive of investment bank Peel Hunt
