How to Revive the UK Stock Market
ASK UK what is actually going on in the City of London and you are greeted with a blank look. Trading the yen and yuan, structuring derivatives, and providing global finance lines are all moneymakers, but they are barely noticed in the public eye. The stock exchange is an exception. Daily news bulletins report on trading at the FTSE 100 index of leading London stocks. Booms and busts are mapped through its rotations. The London Stock Exchange (LSE) is the pounding ground of giant multinational corporations where big city dwellers and fat corporations do huge deals to buy and sell the world’s businesses.
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Or at least it used to be. London’s soaring stock market has spent the past decade falling back to earth. In 2006, companies listed in London made up 10.4% of the global stock market. Today it is 3.6%. London is lagging behind even the laggards: its share of the total market value of Europe has fallen from 36% to 22% over the same period. The residents of the LSE the ones on the left look geriatric. Less than a fiftieth that FTSE The value of 100 comes from tech companies, compared to nearly 40% of those S&P 500 index of American companies. James Anderson of Baillie Gifford, one of the most successful global investors of the era, recently said the Financial Times that Britain has a 19th century stock exchange. He’s right.
One reason for the UK’s miserable stock market is the underperformance of major UK companies. Too many of BP and GSK to HSBC and Tesco (median age 169), have fallen behind at the top of their industries due to the UK’s chronic disease of poor management. That has depressed returns and made some companies vulnerable to takeovers. The entire wealth management industry, tasked with overseeing other firms, is poorly managed. The UK’s most valuable fund manager is now worth less than 10% of the US’s largest fund manager. British pension systems have spent years loading up bonds and selling stocks to eliminate risk. They now have too little influence on economic growth or wealth creation.
The city has also suffered as global corporations with international capital-raising opportunities have drifted away. The revival of London after the Big Bang – reforms in 1986 that deregulated trading – was based in part on the exchange becoming a trading venue for mobile global corporations. In the past few weeks, Prudential, an insurance giant, has decided on a stock offering in Hong Kong and BHP, one of the largest publicly traded companies in London, announces plans for its sole listing in Australia. London’s aspirations to be a hub for European businesses were dealt a blow by Brexit.
The city’s final weakness is the lack of startups choosing to be listed in London. In 2005, London hosted a fifth of the world’s IPOs (initial public offeringS); today it houses a twenty-fifth. An exchange that does not always attract exciting new companies will be like a museum.
It is reasonable to ask how important a poor stock market is. For UK savers, the answer is that it doesn’t do much. They can, should and increasingly will abandon their home orientation and build global portfolios. As owners of superior foreign stocks, you may long for your once great home market, but that’s all. A shrinking stock market is more important for the UK economy. It limits the opportunities for startup founders to expand their business. The UK’s universities, courts and the venture capital scene make it a good place to start a business regardless. But the country’s attractions are dwindling.
The stock exchange is of great importance for the city. London remains a dominant center for trading debt, derivatives and currencies, but stocks are an integral part of any claim to be a global financial center. Listed companies pull other financial activities as well as the accounting and legal services they serve. The financial services industry is the UK’s most successful, contributing 6% GDP and about a tenth of tax revenue.
The worst reaction to stock market stagnation would be if the government put up defensive barriers. It must resist the temptation to veto takeovers or block delistings. An open market lets some companies go, but it encourages others to come too. It is much better to address the underlying causes of the malaise.
One starting point is the UK corporate governance rules for listed companies. Twenty years ago they were the envy of the world, but since then they have sprung up like mushrooms, creating a class of roughly 3,000 semi-engaged and often semi-retired non-executive directors who are seldom and often at the forefront of their global industries think your job is to sell companies, not to get them to invest. This stakeholder group is entrenched but has resulted in poor results and needs to be weeded out. The imperative is less bureaucracy and more directors who understand risk taking, not signaling virtues.
The attractiveness of the stock market can also be increased by the inclusion of dual-class stocks LSEPremium segment. These give some shares a beefed up voting right and are popular with founders who want to stay in control. They are approved by every rival in town. But Britain’s confused legacy fund managers are resisting them at home even though they are ready to buy them overseas.
The reform of the wealth management industry is long overdue. Actuarial regulations create a perverse incentive for companies to hold debt and personal assets, masking volatility because they are seldom valued. This bias should be eliminated. The UK’s 5,327 company pension schemes should be merged into a few large managers in order to invest more competently.
Light the blue touchpaper
The good news is that a cohort of promising companies is emerging. In recent years, venture capital has poured into the UK, which has 34 private startups valued at over $ 1 billion and has produced more such unicorns than France, Germany and Sweden combined. Companies like Revolut, a fintech star, are reaching critical mass. In addition to deregulating corporate governance and allowing double-tier stocks, the government should move swiftly to make it easier for startups to recruit talented foreigners and to allow graduates from leading universities to move to the UK with no job offers. The award is for a new generation of innovative companies listed in London. Time for another big bang. ■
This article appeared in the Leaders section of the print edition under the heading “From the Big Bang to the Whimper”