Reviving the Troubled UK Stock Market: Steps and Strategies

Reviving the Troubled UK Stock Market: Steps and Strategies

The UK stock market has been grappling with a persistent decline in attracting investments, a trend that has been evident for several years. This decline can be attributed to market uncertainty, regulatory and structural challenges, and a cautious investment culture.

Several factors explain this state of affairs. IPO activity has been stalled by economic and market uncertainty, despite some recovery in segments like AIM and sectors such as technology and clean energy. Companies often find UK listing rules burdensome compared to other markets, leading to a trend where firms seek listings abroad. Complex shareholder vote requirements, prospectus obligations, and inflexible listing structures are deterrents. Meaningful reforms are ongoing but not yet fully implemented.

UK investors generally exhibit lower stock market participation than counterparts like Americans, partly due to risk aversion and negative media portrayal of stock investing. This reduces domestic capital inflow into equities. The London market, critics argue, favours financial engineering—including rapid trading and market manipulation—over fostering business growth and innovation, impairing productive investment and innovation funding.

There is a steady decline in market size and liquidity, limiting exit opportunities and deterring new listings or capital raising, which compounds the cycle. To address these issues, potential reforms include regulatory simplification and flexibility, tax and pension rule changes, creating dedicated investment funds, cultural and educational campaigns, and supporting sustainable economic growth.

The Big Bang reforms in the 1980s aimed to professionalize financial markets for large institutions, leading to consolidation and the creation of "universal banks". However, the costs have outweighed the benefits, as the decline in the role of individual shareholders has been accompanied by an explosion of fund managers, analysts, advisers, compliance officers, trustees, brokers, and investment consultants. Reforms should focus on encouraging individual investors back to the London stock market, as they are essential for building an investment culture.

The Covid pandemic brought a return to the frenzy of the late 1990s, with many people seeking returns and entertainment in investing. However, Aim was poorly placed to capitalize from the arrival of new investors. The FTSE Aim All-Share index has a poor performance record since the start of 2020, down by a quarter, 40% since mid-2007, and 75% since the dotcom peak. The UK stock market is currently experiencing an existential crisis.

One reason often blamed for London's problems is the burden of regulation, such as the Markets in Financial Instruments Directive 2014 (MiFID II). To bring London's equity markets back to life, there's an urgent need to attract individual investors to equity markets, seeking the next big success instead of gambling on sports betting and crypto.

The success of London as a financial center can be judged by its role in attracting global banks and international law firms. However, the decline in the UK's main stock market on which it was built poses a significant challenge. In October 2021, a record £2.7 billion fled UK equity funds, marking 36 months of consecutive outflows. Many innovative companies do not rely on bank debt for funding, as they are primarily based on intangible assets such as future cash flows, brand, customer relationships, and technology.

In conclusion, the UK stock market faces significant challenges, but potential reforms offer a pathway to reversing the ongoing decline. By making the UK market more attractive and competitive internationally, while fostering a culture and regulatory environment supportive of long-term constructive investment rather than speculation, the UK can regain its position as a global financial hub.

1. Despite the ongoing decline in investments, some UK investors are still interested in diversifying their portfolios, with options such as investing in bonds, gold, or pension funds.
2. The London stock market, once a hub for bonds, has seen a significant drop in market size and liquidity, making it less attractive for companies seeking to issue bonds.
3. As the government focuses on regulatory simplification and fostering a culture of long-term constructive investment, there may be opportunities for financial institutions to create investment funds focused on dividend-paying stocks.
4. With the decline in stock market participation and the shift towards speculation, some argue that investing in established companies that pay dividends could offer a more stable return compared to the stock market or alternative investments like cryptocurrencies.

Read also: