The government is being urged to stop companies leaving the London Stock Exchange and to incentivise new investors.
The UK’s stock market is shrinking at the “fastest pace in more than a decade”, said Bloomberg, partly due to more company takeovers by foreign firms, but also because other countries are offering better valuations. Around 45 companies have delisted “due to mergers and acquisitions” so far this year, which is the highest number since 2010.
Ministers are being asked to look at ways to stem the tide and stop the outflow of cash from the City, which will also hurt the government’s own economic growth plans.
What is happening?
The decline of the London Stock Exchange is not a sudden phenomenon. Its shrinking has been “under way for a while”, but the “pace of exits has been accelerating”, said The Economist.
To compound that, there are fewer initial public offerings (IPOs) in London too. Last year only 23 companies picked the City to sell their shares to the public for the first time, compared to the “peak of 136 in 2014”.
Both the number of large firms and small-cap firms leaving the exchange is causing concern. Around 12 major companies are “being targeted” for potential acquisition, while the current trajectory of the “downward trend” overall could mean small-cap firms “could be gone from the exchange by 2028”.
Travel giant TUI, takeaway delivery provider JustEat and gambling company Flutter (owner of Paddy Power and Betfair) are just a few of the major firms to pull out of the City this year. And there are ominous signs from the likes of Shell and Unilever that they will follow suit.
Why are companies leaving?
Private equity takeovers are the cause of many immediate withdrawals, with rival takeovers by foreign firms also on the up. But many companies are simply withdrawing to find “higher valuations, a deeper pool of investors and proximity to important markets”, said The Economist.
Key firms are “quitting for the US”, while some have moved to EU countries as a result of Brexit, said the BBC. The New York Stock Exchange also does not tax share sales and purchases, unlike London, where the government charges a 0.5% stamp duty. That alone makes it “not rational” to float on the LSE instead of the US, Nikolay Storonsky, the head of UK banking start-up Revolut, told The Telegraph.
UK investment managers have also been putting far less of their pension funds into the London Stock Exchange. The amount invested in UK shares is down to just 4% from over 40% three decades ago, a figure that is “well below the average of other countries”, said the BBC.
The chairman of M&S, Archie Norman, told the Financial Times that most auto-enrolment pensions are driven into “low risk and low return” investments and most people will “have no idea what it’s invested in”. So this is a missed opportunity to create a “pool of capital available to invest in British institutions”.
What can be done?
The government hopes getting more capital back into the market will drive more investment. Chancellor Rachel Reeves is aiming to “consolidate sprawling local government pension schemes in a bid to unlock investment”, said City A.M.
There is also a drive to simplify the process for IPOs. The Financial Conduct Authority this year set out what it called a “simplified listings regime” to try to streamline floating for firms, while Prime Minister Keir Starmer has pushed further for “authorities to cut red tape” to drive investment.
However, calls for more direct action from the government have yet to be answered. The purpose of stamp duty on shares is not “logically correct” and needs to be looked at, the Lord Mayor of London, Alastair King, told The Telegraph, while Julia Hoggett, the head of the London Stock Exchange, said the UK shouldn’t be “taxing our own investors to invest in our own economy”, This is Money reported.