Money talks: a healthy stock market is an integral part of a prosperous economy
Tucked away in the northern suburbs of London, a sprawling film studio has been transformed into the Land of Oz. The set, where a new adaptation of the Wizard of Oz prequel Wicked is being filmed, is one of more than a dozen fictional worlds that can be created at Sky Studios Elstree.
Sky, now owned by US giant Comcast, launched its 13th and final soundstage on the site, with an opening ceremony attended by Prince Edward, Duke of Edinburgh, on Thursday. The studios will generate £3bn of investment in the UK’s burgeoning creative sector in their first five years.
Comcast is just one of the big players, domestic and foreign, to have invested billions of dollars in Britain in recent years. But while the atmosphere is upbeat in Elstree, the town risks descending into self-fulfilling funk.
The Square Mile has suffered a series of setbacks in recent weeks, raising talk of an exodus from the London stock exchange. It was sparked by microchip company Arm’s controversial decision to float its shares in New York instead of London, despite a campaign from ministers and the London Stock Exchange (LSE).
Within days, several other companies said they were looking across the Atlantic. Among those snubbing London are building materials company CRH, maker of Tarmac, and commercial lender OakNorth Bank.
These recent defections come on top of a long-term trend of UK pension funds withdrawing money from UK stocks and transferring it to overseas stock markets as well as government bonds, known as gilts. .
The figures are startling: in the 1990s, more than half of all shares listed on the LSE were held by British pension funds and insurance companies. In 2000, it was less than 40%. Twenty years later, that figure had fallen to around 5%.
At first glance, this may all seem like a hassle for city dwellers and removed from the everyday life of ordinary Britons. Not so. When the UK’s reputation as a good destination for investors takes a hit, it matters to all of us.
A healthy stock market is an integral part of a thriving real economy, providing businesses with the capital needed to invest in growth and jobs, and giving savers the opportunity to earn a good return.
When companies look to a foreign exchange, it shifts their center of gravity, so jobs – as well as research and development – are at greater risk of moving overseas.
Foreign investors are also more likely to reap profits than UK savers.
Part of the problem is the reluctance of UK pension funds to invest in UK stocks. This means UK pensioners are missing out on returns from companies on their doorstep.
“We will all grow old and we will all need pensions. At present we are not investing enough of our own money in growing the UK,’ says Mark Austin, a corporate lawyer whom Rishi Sunak asked last year to conduct a study on how to improve the functioning of our capital markets.
“Other countries are doing it well and there is no reason why we shouldn’t do it too. Right now there may be more teachers in Ontario [through their giant pension fund] funding British start-ups than teachers in Aberdeen, Belfast, Cardiff or Dover.
Austin estimates that the FTSE 100 index is 30-35% undervalued. Companies — especially in the tech sector — have turned to New York because they believe they can get a higher valuation on this side of the pond.
But, as the collapse of Silicon Valley Bank last week shows, the United States is by no means an investment nirvana. Of the British companies that have listed their shares in the US over the past decade, only three – Manchester United, tech company Endava and healthcare group Immunocore – are in positive territory. The rest are down more than 38% on average (see the underperforming table above). Whether the perception of London as an unattractive market is deserved or not, it risks becoming a self-fulfilling prophecy if not quickly shattered.
Royal Approval: The Duke of Edinburgh at Elstree Studios
Chris Morrison of GAM Investments says the political unrest has not helped Britain’s image with investors. He says: “Historically the greatest strength of the UK and London was that it was seen as a very stable place to be relied on. We have to come back to that.
There are measures the government can take, such as encouraging pension funds to invest more in the UK by changing capital rules. Board governance reforms could also make London more attractive to entrepreneurs.
But much of the solution, say experts like Austin, comes down to a change in culture and attitude.
As Amanda Blanc, head of insurance powerhouse Aviva, said last week, Britain’s financial sector needs to “stop putting itself down”.
Business leaders who believe in Britain have begun to fight back. Steve Hare, head of software group FTSE 100 Sage, said: “We’re backing Britain 100 per cent. We have amazing skills and talents here.
Team GB also includes Simon Peckham, boss of engineering group Melrose, which floats GKN’s automotive arm in London, after considering and ruling out the US.
“We are a UK company, why wouldn’t we float in the UK?” he says. “I know there is currently a drop in the UK market, but it will happen. We’ve been here since 2003 and have had support for every deal we’ve made.
Mark Mullen, boss of challenger lender Atom Bank, agrees: “Atom is a UK company serving UK customers. It makes sense that we are looking to register in the UK.
‘I think it would be unfortunate to see companies choose not to register in the UK when they have developed their success there.’
Letting foreign cash fill the gap is risky
The withdrawal of British financial institutions from investing in British trade and industry was a disaster. By the end of the 1990s, our pension funds and insurance companies owned more than half of UK stocks. It is now around 5%. Instead, foreign investors have arrived and now own more than half of the market.
The reasons are complex and have to do with pension funding rules that pump money into gilts, the long-term impact of Gordon Brown’s raid on dividend payments in 1997, and more.
But the bottom line for UK businesses is simple. It’s harder to raise new capital here than it was a generation ago. When a company went public in the 1980s and 1990s, there was a line of institutions lining up to back it. Some of the shares had to be set aside so that small investors had a chance to buy some. Those days are long gone. The financial impact is that UK companies are rated lower than those listed in New York. This has two effects. This makes them more vulnerable to takeovers and increases their cost of capital. In other words, it costs them more to raise the money they need to invest.
The first is obvious. The series of overseas bids for UK plc is a signal that overseas predators can see the value here, and they have access to cheap funds to back that judgement.
The second is just as pernicious. If it costs more to raise capital, companies invest less and take less risk. They have to think short term. But it’s worse than that. Because they are more vulnerable to foreign takeovers, they try to keep existing shareholders by increasing dividends. It may be good in the short term, but it deprives them of more resources to invest.
It is impossible to quantify the damage. There is no shortage of entrepreneurs and the UK has successfully created many new businesses. We are fourth, behind the United States, China and India, in the number of “unicorns”, that is, companies launched with an initial valuation of more than a billion dollars.
A more buoyant capital market would probably have created more, but you can’t prove it. Nor can you prove that a company raising money in New York rather than London will create jobs in the US rather than Britain, although that seems likely. What is clear is that big business in the UK needs to invest more to improve productivity and create prosperity for the future.
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