While challenges remain, such as outflows from UK equities and the need to regain investor confidence, there are positive signs for the future growth of the UK stock market. The government’s efforts to promote economic growth and create a favorable regulatory environment are crucial in ensuring the UK’s financial sector remains strong and globally competitive.
The Case for Britain’s Unpopular Stock Market
The UK stock market has underperformed significantly compared to its US counterpart since the financial crisis and the Brexit referendum. While coincidence does not imply causality, the numbers speak for themselves. An investment of £100 in the S&P 500 on March 3, 2009, would have grown to £350 by June 22, 2016, whereas the same investment in the FTSE 250 index would have only reached £355.
However, in the nearly eight years since Brexit, the S&P 500 has turned a £100 investment into £281, while the FTSE 250 has grown to only £140. This underperformance has led to a wide valuation gap between the US and UK stock markets, with the US trading at more than 20 times expected earnings compared to the UK’s valuation at just 11 times forecast profits. This valuation difference suggests that the US market may be in the early stages of a bubble, while the UK market appears undervalued.
The sectoral composition of the UK stock market is often cited as a reason for its low rating compared to the US market. The UK market lacks high-growth tech firms that have propelled the US market higher, instead being weighted towards more traditional sectors like mining and energy.
However, research by Rathbones suggests that even when adjusting for sector differences and other factors like growth potential and balance sheet strength, a significant discount remains for UK-listed companies compared to their US counterparts. This discount is also evident when comparing identical firms in the same sector. While uncertainties surrounding Brexit and the UK economy may justify part of this discount, the analysis indicates that there are other reasons for the gap in performance and valuations.
Financial Services and Markets Act 2023
The Financial Services and Markets Act 2023 has received Royal Assent, marking a significant milestone in the UK government’s efforts to regain control of the financial services rulebook and promote economic growth. This Act is central to the government’s vision of creating an open, sustainable, and technologically advanced financial services sector. By tailoring financial services regulation to fit UK markets, the Act aims to enhance competitiveness, deliver better outcomes for consumers and businesses, and unlock around £100 billion for productive investment. Key features of the Act include setting the path for reforms to Solvency II, introducing new secondary objectives for regulatory authorities to facilitate the growth and international competitiveness of the UK economy, and enhancing the scrutiny and accountability of regulators.
The Act also enables the implementation of Lord Hill’s UK Listing Review, which simplifies the UK prospectus regime, making it more attractive for companies to IPO in the UK. It focuses on enhancing the scrutiny of financial services regulators to ensure clear accountability, appropriate democratic input, and transparent oversight. The Act removes unnecessary restrictions on wholesale markets, protects access to cash, introduces crucial protections for victims of payment scams, regulates cryptoassets, and establishes “sandboxes” to facilitate the use of new technologies like blockchain in financial markets. The Act provides a framework to grow the UK’s financial services sector, adapt to changing market dynamics, and ensure regulatory efficiency.
Tui’s Move to Delist from London Stock Exchange (LSE)
Tui, Europe’s largest travel company, has decided to abandon the London Stock Exchange (LSE) and solely list its shares in Germany. This move comes after a vote by shareholders, with 98.35% of them backing the proposal to drop its UK listing. Tui’s departure from the LSE is seen as another blow to London’s standing in international finance. The company stated that the result of the vote clearly showed the support for delisting from the London Stock Exchange. The delisting is expected to take place early this summer. Tui argued that this move would simplify its structure and improve liquidity, with some investors suggesting that trading shares solely in Germany could lower costs and provide support for EU airline ownership.
Notably, about 77% of Tui’s share transactions are settled directly via the German share register, while less than a quarter of trading is in the form of UK depositary interests. This decision comes after Tui’s previous attempt to transfer a large stake owned by Russian tycoon Alexei Mordashov resulted in a criminal investigation in Cyprus, freezing Mordashov’s stake.
Outflows from London Stock Market
Recent figures show that money is flowing out of the London stock market at a record pace. UK savers withdrew £14 billion from UK equities last year, marking the eighth consecutive year of outflows. A closer look at the data suggests that this situation is worsening despite some experts highlighting the attractive valuations of London shares. The outflows are evident in money flowing through Exchange Traded Funds (ETFs), popular tools for both small and large investors. Among 17 European countries, only four have seen greater percentage outflows of money this year.
This record outflow of funds from UK equities can be attributed to several factors. One reason is the overrepresentation of the UK stock market in “old” economy sectors rather than high-growth tech sectors. Ongoing uncertainties surrounding Brexit and its economic implications, political instability, and changes in leadership and policy direction have also contributed to a lack of confidence in UK equities. However, these reasons do not fully explain the performance and valuation gap between the UK and its peers. The substantial outflows from UK equities pose serious challenges for the long-term health of the UK economy, as it leads to higher costs of capital for UK companies and makes them more susceptible to foreign takeovers.
The government has introduced a new “UK ISA” in the budget, allowing investors to put £5,000 a year tax-free specifically in UK shares, in addition to the existing £20,000 annual allowance. However, there are calls for the government to mandate that pension funds hold a minimum level of UK equities to reverse the decline in investment. The Office for National Statistics (ONS) reported that insurance and pension funds’ proportions in UK quoted shares have fallen significantly since 1997, holding a combined 4.2% of UK listed shares in 2022, the lowest proportion on record. This trend highlights the need to address the challenges facing the UK stock market’s attractiveness to investors.
Conclusion
The London Stock Market’s declining popularity and underperformance compared to other international markets, particularly the US, have raised concerns about the UK’s standing in international finance. Tui’s decision to delist from the London Stock Exchange reflects the growing trend of companies seeking alternative listing locations. However, the Financial Services and Markets Act 2023 aims to enhance the competitiveness and attractiveness of the UK’s financial services sector.
