Three ways to rehabilitate the British market

The gold mining sector, spurred by new highs for the coveted metal, is awash with takeovers. Greatland Gold makes a bold acquisition and New York-listed AngloGold Ashanti takes over Centamin. Centamin’s departure is a downer for the exchange, while Greatland is planning a secondary listing in Australia. Gems continue to be mined in London and now even the much-vaunted mining crown is in danger of falling.

Amid this ongoing erosion of the UK market, the capital markets industry continues to fight back and many investment banks and brokers have begun to believe in UK public companies again. But the problem of underperformance in UK equities goes much deeper than just the stocks being out of fashion. While an inflow of capital is well deserved, it is not enough – there also needs to be a culture change.

A new report by Sir Nigel Wilson (former CEO of L&G) and Sir Mark Austin, commissioned by the UK’s Capital Markets Industry Taskforce (CMIT), reveals the extent of the problem. Over the past two decades, the US has outperformed the UK in almost every race. Its productivity is 25 per cent higher and its stock market has delivered an annual return of 8.4 per cent, compared to just 2.2 per cent in the UK. This was not always the case. Until the financial crisis, the two countries were pretty much on a par. So what can be done now to change the course of economic history?

Creating an environment that supports our growth companies and enables established companies to succeed requires strong nudges rather than gentle nudges.

First, the capital taps must be turned on. Matt Scullion, founder and CEO of UK unicorn Matillion, told the CMIT annual conference last week that he had raised $305 million from investors. Only $5 million of that came from UK backers. That’s a remarkable rate for a homegrown success story, but not unusual – many of the UK’s exciting young companies get their funding from US venture capitalists. Their potential is recognised abroad, but not at home. Wilson warns that we shouldn’t underestimate the influence this has on decisions about being taken over by a larger foreign company or choosing to go public.

Second, the outflow of money from the UK is likely to be stopped only through stimulus and campaigning. Wilson attributes the start of the rot in our markets to Gordon Brown’s abolition of corporation tax (ACT), which he calls a “junk decision” that meant there was no longer any reason to favour domestic stocks. Years later, the result is slavish devotion to the MSCI World and billions upon billions being drained from the UK. The more pension funds and retail investors dump their UK holdings, the more the index reduces the amount that should be allocated to the UK, making the problem worse.

In contrast, William Wright, managing director of think tank New Financial, points out that Australian equities are virtually tax-free for pension funds and that as a result 24 per cent of their investments are in domestic equities. Research by New Financial has found that UK pension funds could increase their holdings in UK equities significantly (by as much as 100 per cent) and still comfortably match their historical norms and comparable funds in other markets. This, Wright says, would result in £50-100 billion of returns to the domestic market.

Investment should be encouraged. When the original idea of ​​the UK ISA was proposed, there was an immense outcry – commentators railed about the huge risks involved in pushing people into domestic stocks. But isn’t that worse than keeping all your savings in cash? Wilson also points out that many UK companies generate their revenues in a number of markets outside the UK. As for the £300 billion hidden in cash ISAs, he wryly notes that the UK must be the only country in the world that gives tax advantages to cash.

Third, we need to move away from the idea that investing must be risk-free. There has been encouraging progress here. Regulators – namely the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) – have started implementing a series of changes to create a level playing field for the UK.

Not everyone is buying in. Some pension funds are spooked and private investor platforms have fought hard against the now-abolished UK ISA, which would have imposed costs on them. But the cost to the economy and the UK’s growth prospects of doing nothing will be enormous.

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