Five ways to stem the exodus from London's stock markets

It’s been the best of times and the worst of times for the UK stock market in the past few days. The FTSE 100 index of blue chips surged to a record high on Thursday and its year-to-date performance has crushed mighty Wall Street and beaten other fashionable markets such as India and Japan.

While the price may be right, however, the number of players on the pitch has been shrinking, with a flurry of listed companies defecting to other jurisdictions or succumbing to takeover bids. The £11 billion payments group Wise, which had been seen as a candidate for FTSE 100 inclusion, instead set out plans last week to move its primary listing to New York.

Then this week came a trio of takeover bids for three technology-driven companies — Spectris, Alphawave and Oxford Ionics — meaning in aggregate that £6 billion of market value, and all the trading volume that goes with it, was being taken out of London.

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A final blow was the decision by the board of Assura to reject a home-grown merger offer that would have doubled its size and kept it on the London market. Instead the Cheshire-based £1.6 billion owner of GP surgeries up and down Britain agreed on Wednesday to be taken over by the US private equity group KKR.

The tally of companies with market values of more than £100 million leaving the London market has now reached 30 so far this year according to Charles Hall, head of research at the broker Peel Hunt and a leading campaigner for reforms to stem the outflow. Twelve of the thirty are relatively large companies, big enough to qualify for FTSE 250 membership, the bread-and-butter of the London market.

Meanwhile, Hall said, the hopper is just not being replenished. Just one flotation has been clinched to offset the flood of departures. The UK accountancy firm MHA, under the Baker Tilly umbrella, successfully raised £98 million in an initial public offering and joined the junior market Aim with a market value today of £271 million.

“I think it is fair to say [the pace of exits] is getting worse,” Hall said. “It’s broadly based. It’s across all sectors. It’s just relentless. At the current run rate we’re not going to have much of a stock market left. Politicians don’t get it. They don’t understand the scale of the problem. We are losing our future FTSE 100 members.

“Wise was a massive shot across the bows. People should be horrified.”

The damage is not just to the City eco-system of brokers, lawyers, consultants, bankers and accountants; it also tarnishes the image of London as a place to do business, deters the next generation of entrepreneurs from choosing London and ultimately shifts the centre of gravity of delisted firms away from the UK, hitting jobs and tax revenues in the long run.

Not everyone is so gloomy. Charlie Walker, deputy chief executive of the London Stock Exchange, argues that the flotations slump hitting the UK is just as bad across Europe and the take-private shift is widespread. “This is a global challenge and not just a UK issue. Even the US has 40 per cent fewer listed companies today than it did in the late 1990s.”

Even so, the gigantic premiums at which UK companies are being taken out underlines the scale of the funds outflow plaguing London and piling into private equity. Advent is offering an 85 per cent premium for Spectris. Investors are in effect putting money to work with Advent to buy assets 85 per cent more expensively than if they had just bought Spectris shares in the London market, Hall said. “It’s bananas.”

So what can be done to narrow the valuation gap and so stem the exodus? At least five solutions have been proposed.

Spectris shareholders were being offered an 85 per cent premium

Nudging pension funds

The relatively small allocation to UK assets by British pension funds is seen as one of the key reasons for London’s decline. Retirement schemes in the UK apportion far less to domestic assets than their counterparts in other countries such as Australia, Canada, Sweden and the US.

Pension schemes have pledged to do more in the two Mansion House accords but the focus has not been on publicly listed shares but on unlisted assets such as private equity and infrastructure.

That has been no help to the listed sector and, although senior City people are wary of making it mandatory for pension funds to allocate to the UK, they say there should be a quid pro quo for the tax breaks they enjoy.

David Schwimmer, chief executive of the London Stock Exchange Group, told Tech Week delegates this week: “Some argue the government shouldn’t meddle in where investors invest. Yet pension fund managers happily accept £49 billion a year in tax breaks, effectively a UK taxpayer subsidy for investing in the S&P 500.

David Schwimmer

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“Those tax benefits should only be available to UK pension funds that invest a minimum share of their assets back into the UK. It’s just common sense.”

Hall at Peel Hunt has suggested a minimum of 10 per cent of their total equities pot to UK shares to qualify for tax relief. He is also hopeful that a new disclosure requirement on defined contribution schemes to disclose UK allocations by 2026 will prod or embarrass them into a more pro-UK stance.

Isa reform

Reforming the Isa regime would be a “very rapid solution to the problem” facing the London stock market, according to Mark Slater, who runs the fund manager Slater Investments. Like some others in the City he questions why overseas shares are allowed in the tax-free wrappers.

Changing the rules to allow only London-listed shares and funds that invest in British stocks into these tax-free accounts could help to turbo boost the market, they argue.

“You don’t want government to tell people where to invest ideally,” Slater said. “But I think you can say if money is tax-advantaged, in other words the government’s giving you money, then they have a right to tell you the terms on which you get that benefit.

“If people want to own Apple, they can still own Apple, they just can’t do it through an Isa. Why should the British government seek to lower the cost of capital of Apple?”

The previous Conservative government proposed a “UK Isa”, which would have been an additional £5,000 allowance on top of the existing £20,000 annual sum that can be used at present across Isa products. Only UK investments would have been held in this new product but the proposal was dropped by the Labour government last autumn. Some in the financial services industry had criticised the idea for further complicating the Isa landscape, which already includes several different types of account, and had warned that investors already invest in UK stocks through Isas and might have simply used the additional £5,000 to reduce their allocations to British shares in their main £20,000 allowance. There was also the problem of defining a UK company.

Still, the idea of revamping Isas has not gone away. Rachel Reeves signalled in February that she wanted to overhaul the savings regime to “create more of a culture in the UK of retail investing”. This could possibly involve cutting the £20,000 allowance for cash Isas to encourage a switch to shares.

Scrapping stamp duty

Another way to boost investment in the London stock market would be to axe stamp duty on shares purchases. At present a 0.5 per cent levy is applied to transactions for shares on the main market of the London Stock Exchange, putting the UK at a disadvantage to many other markets, including its main rival in the US.

The Capital Markets Industry Taskforce (CMIT), a body that aims to boost the City, is chaired by Dame Julia Hoggett, the head of the London Stock Exchange (LSE). It warned last year that the tax was a barrier to retail investment and noted that it created the unusual situation where investors are taxed “when buying a UK-listed Aston Martin share but not when buying a German-listed Porsche share or US-listed Tesla share”.

Abolition may encourage retail investors into the London market. It may also boost overall liquidity. The tax pushes up the cost of trading and encourages hedge funds and other investors that trade more frequently to make investments using derivatives such as contracts-for-difference, which are exempt from the duty.

Abolition may also deliver a broader tailwind for the UK by ultimately lowering companies’ funding costs. Yet given the pressure on Britain’s public finances, the Treasury is likely to be unwilling to give up this source of revenues, which brought in £3.2 billion in 2023-24.

“It’s a little bit tone-deaf to the fact that the Treasury have got themselves in a fiscal knot,” Simon French, chief economist at stockbroker Panmure Liberum, said. “I’ve always thought the chance of it happening is relatively low.” He believes, nevertheless, that abolition “would be impactful” for the market.

Reducing compliance burdens

Talk privately to most UK-listed company chairs and the burden and distraction of complying with UK rules and on listing, disclosure and governance soon comes up. It may not be the first reason for seeking a different listing jurisdiction or opting to be taken private, but it carries weight.

The burden is already easing. Listing rules have been watered down and prospectus rules will shortly be given a makeover. The Financial Reporting Council recently unveiled a new version of its stewardship code, which it says offers more flexibility and reduces the reporting burden on listed companies.

Some chairs say that less hostility to large pay packets for strongly performing bosses would also be a helpful way of deterring some companies from considering a flit to more tolerant regimes such as the US. They would also like to see shareholders standing up to the blandishments of proxy voting agencies, whom they accuse of a rigid box-ticking agenda.

New owner for LSE?

One other suggestion is that a new owner for the LSE would help to concentrate minds on London’s troubles. The current owner, London Stock Exchange Group, might contain the LSE name but the London exchange accounts for only £236 million, or 2.75 per cent, of its total £8.6 billion in revenues. Its main operations are in data, indices and clearing.

A new owner more focused on London and more dependent on its success might be no bad thing, some contend. Hall at Peel Hunt paid tribute to LSE’s lobbying power in pushing for favourable reforms such as the relaxation of listing rules, but said that it had done too little on the marketing front to promote the idea of stock market investment. “We don’t have the razzmatazz, we don’t have the pulling power,” he said, pointing to how much more exchanges such as Nasdaq do to promote the excitement of investment to US consumers.

This is disputed by Walker: “We already do a huge amount to promote London. For example, we held 65 events globally last year, attracting 6,500 delegates, including our annual IPO Forum for existing and prospective issuers and our Tech Summit attended by established and emerging tech companies.”

Is LSEG, with all its global ambitions, supportive enough? “Absolutely. David [Schwimmer] is relentlessly focused on LSE,” Walker said.