London is losing its lustre. This week shareholders of TUI, Europe’s biggest travel operator, voted decisively to ditch its world-renowned stock exchange for Frankfurt, citing the potential for a slimmer structure and improved liquidity.
So what? The move was on trend and painful for UK plc, especially in a recession. Since 2021, nearly 10 per cent of the market value of the FTSE All-Share has left, including star firms like BHP, CRH and Flutter. A meagre 23 companies listed on the LSE last year, down from 45 in 2022 and 119 the year before. Meanwhile the sectoral profile of the FTSE 100 – composed of miners, financials, energy and only two tech companies – leaves much to be desired.
Arm, the chipmaker headquartered in Cambridge, is up 190 per cent since it floated on New York’s Nasdaq last year. If it had stayed in the UK, it would now rank third on the FTSE.
This isn’t solely a matter of prestige for the City. The economic consequences are real and are already being felt through
- pension pots;
- the tax take; and
- the ecosystem of businesses – audit, legal and advisory – that feed off a healthy pipeline of initial public offerings.
British investors have been pulling money from UK-listed stocks for the last 32 consecutive months. That in turn is depressing valuations – London currently trades at around a 40 per cent discount compared to New York – and turns companies into sitting targets for takeover by private equity firms.
Why bother? For some, the short-termism and scrutiny of being a public company is hardly worth it. According to Charles Hall, head of research at Peel Hunt, a large number of high-performing businesses are asking questions about why they’re listed: “It’s hard work. They’re having to see investors the whole time, they have annoying analysts asking them questions, there’s a huge amount of bureaucracy and their annual report is 200 pages long.”
Listing anywhere requires paperwork, but there’s still a noticeable drift towards the US. Birkenstock, the sandalmaker, decided to drop Germany in favour of a listing in New York. Gaining exposure by listing alongside the US’s “Magnificent Seven” – the top AI-driven tech stocks – is a “siren call”, says Hall. Similarly, if Arm had listed in the UK, a “trickle down effect” in terms of asset allocations would be expected.
Market medicine. There’s no shortage of regulation-lite suggestions for rebooting Britain’s bourse. Most tackle the demand side by encouraging domestic investment in UK assets. Some are reportedly being considered for the upcoming March budget. Here’s a non-exhaustive list:
- Consolidate the pensions industry to allow more purchasing power and risk taking. There are over 5,200 defined-benefit pension schemes in the country, which typically take a zero-risk approach, and a further 27,000 defined-contribution schemes.
- Tax credits that incentivise investing more into equities (and not just low-risk bonds). One option might be to broaden the inheritance tax exemption for AIM-listed companies. This allows small businesses to continue to trade after the death of the owner, without being sold to cover the inheritance tax bill.
- Union Jack ISA. Create an ISA allowance dedicated to investing directly into UK small and midcap companies.
- Scrap stamp duty on small and midcap share-trading to improve liquidity. In the short term this would cost the exchequer £3.3 billion a year, but Peel Hunt says it would be offset by increases in the tax take elsewhere as the economy gets a boost.
- Economic literacy is key. In the UK employers tend to choose pensions for their staff; in Australia, it’s up to individuals and this devolution has reaped rewards: the average Australian high-growth superannuation fund has delivered 8.8 per cent annualised returns over the last decade, compared with 7.6 in the UK.
Tinkering? The best fix for the LSE is to fix the wider economy, and it’s telling that one reason TUI shipped out was Brexit. It could be a while before the UK rejoins the single market and the City reprises in earnest its role as Europe’s Wall Street. In the meantime governments will have to focus on
- fostering entrepreneurship,
- making the most of a strong services sector,
- investing in parts of the country outside E1 and
- tinkering with pension rules and tax credits as above.
The FTSE does not equal the economy. But reviving it can’t hurt.
