Just before 8am on Tuesday morning, around a dozen top bankers trudged into Number 11 Downing Street to solve a pressing problem.
The London stock market, a beacon of Britain’s standing in the world, is rapidly losing its status as a global centre for raising new capital.
Companies that once jetted into Heathrow to tap London’s vast pools of money are slowly fleeing to the US or into the arms of private equity buyers. Even those who are already listed here are starting to flee.
The London stock market just endured its quietest year since 2010, according to EY, while investors have continued to remove billions from UK equity funds.
At £2.3 trillion, Apple is now worth more than the entire British stock market.
Alarmed by the slide, Chancellor Jeremy Hunt has tried to shore up London’s prestige with a package of reforms designed to get more money into British stocks.
The so-called Edinburgh Reforms aim to revive the market by encouraging pension funds and savers to buy stocks, and attract more companies to join the market by relaxing listing rules. The Chancellor’s Capital Markets Breakfast on Tuesday was a chance to hear industry concerns.
What is behind the slump? Figures in the City point the finger of blame at the Brexit vote and the political instability in Westminster that followed.
Xavier Rolet, the former chief executive of the London Stock Exchange, says decades of bad policies did the most damage but Brexit “added pain”.
“London was a global financial centre and it derived its undisputed global leadership from the fact that any company could find a solution of a global nature,” he says. “If you take out one big chunk, you’re no longer global. If you send a message… that you’re not welcome, that message will be heard.”
London’s stock market is still significant compared to others around the world, but it has been much healthier.
Between 2015 and 2020, more than 360 companies listed new shares on the LSE, according to EY data, an average of 60 new listings per year.
Before Brexit, floats like the Royal Mail and private equity-backed IPOs helped London compete with New York as a destination to raise new money.
The 2015 float of global payments processor WorldPay encapsulated the bullish mood. Valued at nearly £5bn, the tech giant could have chosen to list in rival New York but picked London.
Today, things have soured.
Just 23 companies came to the market in 2023. Companies that did list have performed badly.
Shares in fintech CAB Payments have plunged by 70pc since their debut. Arm’s decision to list shares on the Nasdaq rather than the LSE has also been a hammer blow to confidence and more companies have snubbed the market since.
Glencore, a longstanding FTSE 100 business, recently decided to list its coal spin-off in New York and the IPO of UK trading house Marex is taking place in the US. Companies are in the process of quitting London or moving their primary listing abroad.
Building materials company CRH, betting group Flutter Entertainment, travel agent TUI, and packaging supplier Smurfit Kappa are all either moving wholesale or taking up secondary listings elsewhere.
The stock market has shrunk significantly as a result. The universe of British-listed stocks has become 20pc smaller since 2017, according to Peel Hunt, as a result of takeovers and company exits.
The number of companies on the junior stock market and FTSE Smallcap shrank by double digits last year.
“What Brexit has done is to reveal the fact that some of the busyness of London – the centrality of London as a financial hub – was due to our position in Europe,” says James Wootton, global co-head of equity capital markets at Magic Circle law firm Linklaters.
“If you’re going to choose to list in Europe, to some extent you might as well list in London as the point in Europe with the deepest capital pools and the greatest liquidity.
“Once London takes itself out of that and you become a third party competitor, we’re competing against Europe as well as against the US.”
Before Brexit, when markets had been buoyed by the Scottish referendum vote and the fiscal policies of the coalition government, UK stocks were highly prized. They traded at a premium to global stocks.
But as investors shunned the UK market in ever greater numbers after Brexit, that valuable premium disappeared.
More sellers than buyers has driven down the price of shares over the past few years.
Unloved UK equity funds suffered their 31st consecutive month of net selling in December, and the third year of net outflows in a row, according to Calastone.
Simon French, chief economist at Panmure Gordon, says Brexit was the catalyst which triggered the UK stock values to plunge.
“The rigmarole of 2017 to 2019 gave investors an excuse to under-allocate because they didn’t know what would happen,” he says.
UK shares have lagged their international peers ever since Brexit and the spread is now at a three-decade low of 19pc, according to Panmure Gordon. The Bank of America Fund Manager Survey, which polls investors about their sentiment towards different markets, has consistently shown money managers are apathetic at best about Britain.
While Brexit is often blamed for London’s moribund market, many also point to long-standing problems with the British stock market that go back decades.
“I’m not convinced it is because of Brexit,” says Martin Gilbert, former chief executive of FTSE 100 fund manager Aberdeen Asset Management.
“Structural, systemic changes in the portfolios of pension funds had the biggest effect. It’s just the cycle and it’s nothing to do with Brexit.”
Pension funds used to be one of the UK stock market’s biggest investors but since the Robert Maxwell scandal at the Mirror Group pension scheme increased regulation has prompted them to make ever safer investments.
According to Peel Hunt, UK pension funds and insurers used to own about 44pc of the UK equity market two decades ago and now own just 4pc. The intense focus on risk management has effectively pushed the UK’s vast pool of pension and insurance capital away from the London stock market.
“This is not a Brexit issue,” says Citi UK chief executive Tiina Lee. “This has been in the making for the last 25 years.
“There has been a process where risk minimisation has really taken hold in the UK and 25 years on there’s been a massive de-equitization of the market.”
Rolet says the trends towards a slimmer stock market were already in train before Brexit and a result of political decisions taken by the UK government over many years.
“We have a regulatory framework in the UK that makes it prohibitive for pension funds and insurance companies to hold a significant amount of equities. Unless this is repealed there is absolutely no way that UK equity markets are going to recover.
“Brexit has added to the pain in a significant fashion but the conditions were set for an increase in decline of UK and EU markets before that.”
City minister Bim Afolami MP argues that the problems with the stock market reflect global issues.
“There have been difficulties with capital markets but that is the case in all European countries,” he says. “It’s the case in most places, including the US, but much less so in the US. There has been a global shift towards private capital for a bunch of structural reasons.”
Analysts are also quick to argue that London’s listing drought is the result of the wider global economic slowdown that has proved to be a drag on deal-making.
Listings dropped 8pc across the globe last year, according to a report by EY.
“We have seen the IPO market around the world shutdown as things have occurred externally – the war in Ukraine, high inflation, high interest rates,” says Scott McCubbin, who leads EY’s UK and Ireland IPO team.
London’s stock market has also had to compete with the rise of private capital, fueled by an era of rock-bottom borrowing costs and low inflation.
The abundance of private equity, venture capital and sovereign wealth has seen up-and-coming entrepreneurs lured away from public markets with the prospect of greater control over their businesses, bigger paydays and the freedom to operate out of the public eye.
Old industry struggles to compete
Another explanation for the malaise lies in the composition of Britain’s stock market. While Big Tech has fuelled the US stock market’s stellar performance – Amazon, Apple and Tesla are among the ‘Magnificent Seven’ stocks that have driven massive gains this year – the UK’s blue-chip companies have faced repeated setbacks.
“The exposure to old industry companies that in a number of cases have faced quite significant structural challenges has been a problem for the UK market,” says Ben Ritchie, head of developed market equities at investment fund Abrdn.
Energy and mining giants featured on London’s commodity-heavy index have faced their reckoning with the post-pandemic focus on ESG, while banks have been lumbered with EU red tape and, until recently, low interest rates. Ritchie says: “The focus on sustainability from investors has probably also been a negative for the UK market.
“If you think about the large elements of exposure to oil, mining, tobacco – those are all areas of the UK market where investors probably increasingly found it more difficult to invest in those sectors given sustainability requirements from their clients.”
Meanwhile, France’s range of high-performing luxury consumer groups, such as LVMH, enabled Paris to briefly seize London’s crown as Europe’s largest stock market in 2022 as the ultra-wealthy weathered the cost of living downturn.
The UK’s laissez faire attitude towards M&A compared to more protective rivals in the bloc has also allowed private equity firms to easily pick off its rising stars and undervalued minnows.
“We’ve been happier to see smaller and midsize companies taken over, which has probably meant that some of the businesses that might have grown into global champions listed in the UK have just never had the opportunity because they’ve been acquired much earlier in that process,” says Ritchie.
Average UK takeover premiums soared to 51pc last year, up from 37pc in 2022, according to AJ Bell. While it may seem like UK investors are getting a great deal, it speaks to just how undervalued British-listed companies have become.
EQT, a Swedish private equity house, joined last year’s bargain hunters after buying UK veterinary drugmaker Dechra Pharmaceuticals for £4.6bn, 44pc higher than its closing share price before the buyout was announced.
The Northwich-based company has since been promoted to the FTSE 100, marking a short-lived return to the blue-chip index before the deal completes this year.
After years of taking the UK’s unloved stock market for granted, policymakers are now desperate to salvage the City’s standing.
The Financial Conduct Authority last month outlined detailed proposals to streamline London listing’s regime, including a new category designed to make secondary listings more attractive. Hunt’s Edinburgh Reforms and other measures have also been put on the table as a panacea to London’s stock market difficulties.
Afolami says: “What Brexit did was give us an opportunity to deal with some of the friction points that are developed in our system.
“We are using legal and regulatory reform, going alongside the shift in cultural mindset and market practice, to make sure that we increase investment in British business, we increase wealth for ordinary retail investors and we increase the size of the economy.”
The reforms have been welcomed by the industry, who say it is a step in the right direction. Citi’s Lee says: “If we want to attract and keep growth companies in the UK we have to provide the right type of domestic demand.” But she adds: “This is not going to be fixed in a year.”
Charles Hall, head of research at Peel Hunt, said last month: “Traditionally there’s been a view that you just let equity markets get on with it and they just reflect what’s going on elsewhere.
“Increasingly, there’s a view that you need to nurture your equity market. We are operating in a global capital market and if we don’t nurture our equity market, it will be somewhere else.” The so-called British ISA is an example of one of the initiatives underway to try and spur buying of UK shares.
By making it more attractive for ordinary investors to buy British stocks, the hope is it will help drive up prices, increase demand and create a virtuous cycle to take London back to the top.
Prime Minister Rishi Sunak, who formerly worked at Goldman Sachs and hedge fund TCI, has done his best to give momentum to the proposals. Earlier this year he hired former Morgan Stanley banker Franck Petitgas, who was present at Tuesday’s meeting, as business and investment adviser.
French-born Petitgas worked for the Wall Street bank for more than three decades, giving him credibility in the world of global finance.
The London Stock Exchange itself is also ramping up efforts to improve its standing, with chief executive Julia Hoggett constantly working the City circuit banging the drum for the benefits of listing in Britain. While listings were down, the total capital raised in London, which includes new listings and money raised from existing companies, was up 30pc last year.
“The London Stock Exchange remains the leading capital raising venue in Europe by pretty much any measure – that has been the case for decades and remains true today,” she says.
“Markets globally have been subdued for the past couple of years, impacted by a number of factors including rising interest rates, inflation and geopolitical uncertainty.”
More at stake
The London Stock Exchange is the poster child for Britain’s financial markets and has become a barometer for its success or otherwise.
However, there is another Brexit-hit industry facing bigger concerns. Interest rate swaps represent the world’s largest financial asset and London has been a regional hub for their trade for decades.
But London may lose its important role as Brussels seeks to wrestle control of the lucrative market. The UK is set to lose the right to clear swaps priced euros from June 2025, with EU officials keen to repatriate the €735 trillion market.
The US has been offered a special status which allows euro swaps to be executed in America, meaning Europe’s swaps could move to New York.
The loss of such an important market because of Brexit could hurt the UK much more than the stock market, says Rolet. “All that attention is given to equities because they’re a symbol but they are microscopic compared to interest rate swaps,” he says.
“The G20 basically clears in London. It’s a quadrillion dollars a year of notional risk. That is the big prize and the big winners could be the US investment banks.”
Afolami says the Government was “ready to work” with the EU to make sure clearing is “regulated and supervised sensibly”.
“Equivalence is a unilateral decision by the EU. It’s a global norm to allow market infrastructures from other jurisdictions and to not do that would inhibit the global financial system.”
Talks between Afolami and his EU counterparts continue but Brussels has so far not signalled it is willing to grant equivalence.
As the bankers trooped out of the Treasury on Tuesday, there was optimism in the air. For London’s sake, it needs to work.