While not wanting to be as negative as other industry voices, it’s worth facing the music head-on when it comes to the problems facing the UK market.
The performance of the UK stock market, especially when compared to our counterparts across the Atlantic, reflects the current and future issues facing the UK financial system. Reading the numerous comments over the last 12 months, it seems that many didn’t see de-equitisation coming, which is a bit like not seeing the train lights coming down the tunnel.
We live in a policy world designed to make it difficult for the UK stock market to operate, transforming a once golden, vibrant listing and funding market into something of a backwater.
It’s possible the cause was Gordon Brown’s decision in the 1997 budget to remove the pension fund dividend credit which would start the firing gun on the dismantling of the great UK pension industry. What started as an initial tax grab for a mere £5 billion, has cost more like £250 billion of investment damage, but more astonishingly, was an instrumental driver for UK equity holdings falling, from 50% in 1997 to 4% in 2023. Nowadays, pension funds, not even our own Parliamentary Retirement Fund hold UK equities and as a result, the tax grab generates next to nothing for the state.
Meanwhile, the UK stock market has become fixated on compliance and regulation, which has unquestionably had a disproportionate impact on the small-cap end of the market. While AIM has, over time, been a great growth market with notable success stories including Domino’s Pizza, Fevertree Drinks, Jet2.com, and ASOS, it is in danger of losing out to private markets if it isn’t able to evolve to meet changing market demands.
This is a competitive world for capital where PE, venture, and overseas capital don’t revolve around heavy technical rules. Instead, they rely on performance, good strategy and rewarding talented executives for value creation, something public markets seem to have forgotten. Heightened levels of regulation might have worked in boom years with a surfeit of deals but in the current environment it’s strangling growth, meaning our most talented management teams spend more time reading compliance manuals rather than driving shareholder value.
On reform, the Great British ISA proposal is a good one. Backing British companies with UK savings is common sense, however, as with all these policies the devil is in the detail, and at the moment common sense isn’t something that comes naturally to this Government. Savings definitely need to be encouraged and an extra annual allowance for UK investing will also help remove the state support burden for people in their retirement.
With the announcement of the general election, however, potentially derailing the launch of the Great British ISA, there are three obvious areas which would provide a fundamental boost to UK markets. Firstly, an increase in entrepreneurs relief specifically for companies that float in London and for those investors that hold their shares for a defined minimum period. This will immediately incentivise entrepreneurs to list companies in London and enable true democratic share ownership by being listed for the long-term.
Secondly, regulators should remove dealing costs levied against small-cap funds, which drain liquidity from the smaller end of the market. Finally, the Risk Weighting rules imposed post the Woodford debacle need changing. These reforms were implemented after a high-income fund invested a large portion of its funds in illiquid, non-income paying private companies. The train lights could have been easily spotted and are unconnected to UK-small cap funds, most of which are not mandated to invest in private companies. These three points could hugely enhance the market for companies listed in London, helping the engine room of UK Plc.
Tim Cockroft is founder and Executive Chair, Singer Capital Markets
