How to revive the UK stock market

ASC BRITONS what is really going on in the City of London and you are greeted with blank stare. Trading the yen and yuan, structuring derivatives and providing for the global financial system are all money, but they are barely visible in the public imagination. The exception is the stock market. Daily newsletters report trading on FTSE 100 index of leading London stocks. The ups and downs are marked by his rotations. London Stock Exchange (LSE) is a springboard for giant multinationals where city slickers and corporate fat cats make huge deals to buy and sell global companies.

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At least that was the case before. The popular London stock market has crashed to the ground over the past decade. In 2006, shares in companies listed in London accounted for 10.4% of the global stock market. Today this figure is 3.6%. London lagged behind even the laggards: its share of the total market value of Europe fell from 36% to 22% over the same period. Inhabitants LSE those that remain look geriatric. Less than one fiftieth FTSE 100 cost comes from tech companies, up from nearly 40% S&P Index of 500 American Firms. James Anderson of Bailey Gifford, one of the most successful global investors at the time, recently said Financial Times that Britain has a 19th century stock market. He is right.

One of the reasons for Britain’s poor performance is the poor performance of large UK firms. Too much from BP and GSK To HSBC and Tesco (mean age 169) have dropped out of the top tier of their industries due to a chronic UK illness of mismanagement. This resulted in lower profits and made some firms vulnerable to takeovers. The entire asset management industry, which oversees other firms, is in poor shape. The most valuable UK fund manager is now worth less than 10% of America’s largest. British pension schemes have spent years buying bonds and selling stocks in a shortsighted quest to eliminate risk. They are now too little subject to economic growth or wealth creation.

The city has also been hit by the withdrawal of global firms with the ability to raise international capital. London’s resurgence after the Big Bang, the 1986 reform that removed the regulation of trade, depended in part on the stock exchange becoming a platform for global mobile business. In recent weeks, insurance giant Prudential has opted for an IPO in Hong Kong and HP, one of the largest London-based companies, announces plans for a sole primary listing in Australia. Brexit has dealt a blow to London’s ambition to become the center of European business.

The City’s latest weakness is the lack of startups that prefer to be based in London. In 2005, London hosted a fifth of the world’s initial public offerings (IPOs); it’s one twenty-fifth here today. The stock exchange, which constantly does not attract new interesting firms, will begin to resemble a museum.

It is reasonable to ask how much a frail stock market matters. For UK investors, the answer is that it is not much. They can, should, and are increasingly abandoning their home biases and building global portfolios. As owners of larger foreign stocks, they may be nostalgic for their once-great home market, but that’s about it. For the UK economy, the shrunken stock market is more important. This limits the ability of startup founders to expand their firms. British universities, courts and venture capital make this place a good place to grow your business anyway. But the country’s appeal is dimming.

For the city, the stock market is of great importance. London remains the dominant trading center for debt, derivatives and currencies, but equities are an important part of any claim to be a global financial center. The listed companies have an impact on other financial activities, as well as the accounting and legal services that serve them. Financial services industry is the most successful in the UK, accounting for 6% Gdp and about a tenth of tax revenues.

The worst reaction to stock market stagnation would be the creation of protective barriers by the government. He must resist the temptation to veto takeovers or block de-listing. The open market allows some firms to leave, but it also encourages others to come. It is much better to tackle the deeper causes of the ailment.

The starting point is the UK corporate governance rules for listed companies. Twenty years ago they were envied all over the world, but since then they have grown and created a class of over 3,000 employed and often part-retired non-executive directors who are rarely at the forefront of their global industry and often think. their job is to sell firms, not push them to invest. This interest group has become entrenched, but it has produced unsatisfactory results and needs to be eradicated. Less bureaucracy and more directors who understand how to take risks rather than signal virtue are urgently needed.

The stock market can also be made more attractive by allowing dual-class stocks to join LSEPremium segment. They give some shares the right to vote and are popular with founders looking to retain control. They are resolved by all rivals of the City. But bewildered UK heritage fund managers are opposing them at home, even if they are willing to buy them overseas.

Reform of the asset management industry is overdue. Actuarial rules create a perverse incentive for firms to hold debt and private assets in which volatility is masked because they are infrequently valued. This bias should be eliminated. 5,327 UK corporate retirement plans should be consolidated into several senior managers with the scale to invest more wisely.

Light up blue touch paper

The good news is that a cohort of promising firms is emerging. Over the past few years, venture capital has poured into the UK, where there are 34 private startups worth over $ 1 billion and more unicorns created than in France, Germany and Sweden combined. Companies like Revolut, the financial technology star, are reaching critical mass. In addition to deregulating corporate governance and allowing dual-class shares, the government must move quickly to make it easier for startups to hire talented foreigners and allow graduates from top universities to move to the UK without a job offer. The prize represents a new generation of innovative London-based firms. Time for another Big Bang.

This article appeared in the Leaders section of the print edition under the headline From Big Bang to Whimper.

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