Time for Hunt to go with the flow
Back in July the Chancellor, Jeremy Hunt, unveiled his plans to reform the UK’s ailing stock markets. In that mid-summer speech at the Mansion House he signalled that final decisions on his Edinburgh Reforms would be made ahead of the Autumn Statement. With that Statement now under a month away what should investors and companies expect to hear?
The Treasury is acutely aware that investors in UK stock markets have been swimming against an outgoing tide for years. Institutional asset managers – namely pension funds and insurance companies – have been reducing their allocation to UK shares for at least two decades. At the turn of the century these long-term investors held 40% of all UK shares. Today that is closer to 4%. Whilst this pivot away from shares has been a global trend the UK investment industry has gone further, and faster. Equity investment that has taken place pivoted to global companies – listed outside the UK – as the UK stock market underperformed its peers. This has created something of a doom loop of falling liquidity and company valuations. The upshot is that UK companies looking to finance their growth through public equity are now at a significant and sustained economic disadvantage. Our analysis at Panmure Gordon suggests that the cost of financing a UK-listed company is 23% higher than an equivalent company looking to raise equity overseas. It is why UK companies are looking at international stock market listings or being bought by overseas private equity investors. There is little doubt that the poor productivity, investment, and wage growth of the last two decades is partially linked to this trend.
It is easy to dismiss this as a financial sector story. Poor bankers weeping into their newly unrestricted bonus pots. A sickly stock market is not a story that immediately attracts public sympathy, even though financial services make up 8% of the UK economy and contribute 12% of all tax revenues. However, that would be to ignore the central role that UK stock markets play in sharing the proceeds of economic growth, financing innovation, reducing reliance on foreign technology, and shortening supply chains. Whilst the US and China are pursing this agenda with huge subsidies and by running large deficits – a risky stance as interest rates reach a two-decade high – the UK would be unwise to follow suit. Mr Hunt will be looking for options that cost nothing and preserve order in the market for UK government debt – one of his Mansion House “golden rules”.
This is where the UK’s pensions industry – the second largest in the world – needs to step up and be encouraged to reverse flows out of UK equity markets. Staggeringly there have been net outflows for seventy-five of the last ninety months – totaling more than £43bn. This has dramatically raised the cost for companies looking to raise investment capital in the UK. So, what should be done?
An important thing to acknowledge is that the current Government, and the Labour opposition, are both attuned to the seriousness of the problem. The Edinburgh Reforms appear to have bipartisan support – a rarity in the current political climate. However, to date, jawboning on the need for reform has received an underwhelming response from investment decisionmakers. There are three proposals Hunt should be considering to reintroduce the “natural buyer” of UK shares. This is a natural buyer that has drifted away over the last twenty years leaving the financing of the UK’s corporate base in the hands of international investors.
The first area ripe for reform, and certainly the least contentious, is to put a floor under the amount of UK equity ownership held by public sector pension schemes. It was revealed recently that the parliamentary pension scheme invests a pitiful 1.7% of its assets in UK-listed companies. Whilst we should be cautious of government-mandated investment decisions, if there is a positive social and economic spillover from supporting UK companies then schemes that are underwritten by the taxpayer should be encouraging that outcome. This is consistent with the way the Treasury have been encouraged to take a “whole economy” view as part of the government’s Levelling-Up agenda.
Second, the government should consider returning the tax advantages of saving in a Stocks and Shares ISA to its original form – which was eligibility for UK-listed shares. The decision to widen this to global shares in 1999 was admirably globalist. But in the current race to develop a domestic supply chain, the UK’s commercial competitors in Europe, Asia and the Americas do not warrant a UK taxpayers’ subsidy on their balance sheets.
Third, individual share ownership in the UK has gone out of fashion. So many Britons feel disconnected from wealth creation and having a stake in the UK economy’s success. This is a culture that is inconsistent with a fast-growing economy. The Treasury has at its disposal a range of COVID-era loans that have been converted into equity, as well as twenty-four large assets managed by UK Government Investments. These could be the seed assets for a national wealth fund from which all UK citizens benefit. Such an approach is culturally powerful – it could blend both the popular “Tell Sid” campaign associated with the 1980s privatisations, and also a model used by the Swiss National Bank whose shares pay a regular dividend to Swiss savers and are listed on the Swiss stock market. It is striking that the Labour Party are looking at similar models developed in countries like Singapore. Such a fund can then take strategic stakes in UK companies, as has been successfully done in Canada and Australia.
There is little surprise that the sickly state of UK stock markets has gone largely unnoticed. More obvious economic challenges of Brexit, cost of living pressures, regional inequalities and strains in public services have a greater public resonance. However, the one thing that everyone agrees is that economic growth is central to addressing these challenges. There are few things that Mr Hunt can do between now and election day that would boost growth and cost him nothing. Transforming flows into the UK stock market is one. As one large US investor in UK companies told me last week: “get this right and UK shares could easily rally 30 to 40 percent”. Such views reflect the current negative stance on UK shares and from sustained outflows. Mr Hunt has shown himself to be a quietly ambitious reformer over the last year. It’s now time for him to go with the flow.
Published on 31/10/2023