Reports of the London stock market’s death are greatly exaggerated – Dr Clive Black & Mark Brown
Dr Clive Black & Mark Brown, Vice Chairmen, Shore Capital Markets
‘Economic growth’ will be a perpetually trotted out term in the United Kingdom in 2024 ahead of a certain General Election and thereafter. The reasons are significant; the UK has a need to fund ongoing public services, but Government debt and the national tax take are high with public spending at near all-time peak levels too, which sets limits on the art of the possible.
Without economic growth, we think the scope to sustain British public services and wider living standards will come into serious question. Such prospects are bad for political parties, bad for the business environment but worse for society. And hence, we see the broad appetite to discuss the UK’s economic growth and, hopefully, the capability to do something positively about it.
To Shore Capital, with international interest rates now well through the ZIRP cycle (zero-interest rate period) and so set to be normalised in a low-to-mid-single digit percentage range from here on, as monetary policymakers lick their wounds from a material miscalculation of inflationary forces in the early 2020s, the need for equity capital becomes more important to the purpose of economic growth.
Additionally, those normalised but higher ongoing interest rates also mean that equity is being favourably repriced compared to debt for investing and publicly listed firms, noting that ongoing leverage ratios in the private capital world have notably receded (equity capital markets, notably London, have tended to operate with reasonable rather than excessive leverage levels, which protects shareholder interests through credit cycles).
The London equity capital market has had much better times than has recently been the case. A variety of factors account for relatively low UK equity ratings compared to some other bourses, a factor encouraging take-out activity of attractively valued stocks to domestic and international suitors, which alongside a limited number of new issues, means that the number of listed stocks has notably slipped backwards in recent years. Indeed, the number of businesses listed on the London Stock Exchange is now below 1800 compared to over 2500 ten years ago.
At the coal face, outflows from UK equity funds within the asset management sector have been a critical feature of recent and current challenges faced by equity capital markets. Correspondingly, liquidity has been low, fuelling the above-mentioned problems and encouraging many companies to engage in de-equitisation through buy backs. The present cycle clearly needs to be broken if equity capital markets are to support economic growth, with greater liquidity the lifeblood of future activity.
Whilst all this is so, we also must be honest enough to say that the capability, performance, and reputation of the UK Government for some years now has not been especially helpful to the London exchange, quite the reverse, with respect to encouraging the UK as a destination for investment and so the prospects for the British economy. Additionally, regulators and vested interest groups need to reflect on their policies and behaviours when it comes to making the UK a great place to do business, which includes attracting and rewarding the best talent, so remuneration policies. Compared to some elements of foreign equity capital markets and private capital, British listed players have arguably been competing with one arm behind their backs.
We do not believe that such challenges are insurmountable though and with the aforementioned General Election around the corner, some of the recent political baggage may be lifted whilst the London Stock Exchange is alive to and working towards a better context for listed equity capital, which we support; noting that good governance is most apparent in the public arena, with all of its transparency, something that we think is too often overlooked and should be espoused as a virtue!
We also believe that the UK Government and public bodies responsible for financial services and monetary policy should be more alive to providing incentives for savers and the investment community in its homeland to support British firms, as opposed to those listed overseas. In this respect, we welcome the airing of this view, which may yet lead to beneficial change noting too the calls from Shore Capital Markets’ Chairman, Xavier Rolet, for reform of the Solvency II regulatory capital strictures on UK insurance companies and pension funds investing in equities, reform of the Financial Transaction Tax, revisiting the taxation of dividends from tax-exempt institutions, and reflect upon the deductibility of interest from banks when over-leveraged, which could help to fund the above mentioned tax reforms on equities.
However, such matters are not the nub of why we believe that equity capital markets will remain key to backing British business. The reality is that the British economy needs firms that will provide solutions to ongoing problems, develop products and services that enhance society, and in doing so generate the wealth and employment that will go on to provide the incomes, dividends and gains that feed the economy and generate tax revenues to fund public services. Equity capital markets are also significant components of the UK economy in their own right, with considerable international heritage, relevance and competitiveness. In essence, we believe that a functioning equity capital market will be central to ongoing economic growth in the UK.
“The present cycle clearly needs to be broken if equity capital markets are to support economic growth, with greater liquidity the lifeblood of future activity.”
Enterprises will always need capital and in this respect, this is where stock broking, a much-maligned vocation at times, has a very virtuous sense of purpose, which is: linking good businesses that need capital to grow to those that hold the capital, savers, and investors.
Clear qualifiers here are good businesses and the need for growth capital. That capital in the case of equity markets is permanent, unlike many buckets of private capital that may need an exit and, in some cases, explicitly plan for it. We see permanency as something that many entrepreneurs will be attracted towards but may lack awareness. Indeed, it is worthwhile remembering that when a growth firm needs additional capital, assuming that the strategy is proceeding to plan, and even in times of challenge in the right circumstances, those invested portfolio managers are more likely than not to be supportive and in a timely process compared to some other sources of funds. In this regard it is worth pointing out that at a time of crisis through the Coronavirus pandemic many firms overnight raised 20% of their issued share capital from supportive equity shareholders.
Equally, listed companies are overseen by boards of non-executive directors, which where aligned are a virtue to the business. However, again unlike some, maybe most, private capital ventures, they allow the management to run the firm, do not need to overly interfere in operations and management accounts, as opposed to ensuring that the firm abides by its stated intentions within the necessary parameters of good governance. Again, for entrepreneurs, including those that wish to retain a major equity participation in their business, we see such collaborative ways of working as virtuous.
We believe that the cycle of liquidity outflows in the UK will ease (weightings cannot go negative) and positively turn in due course. We make this assertion partly because of the removal of a negative in terms of sentiment towards a tired and rudderless current British Government but also because UK inflation looks to be in a more manageable place; the UK base rate cycle is about to enter a reduction phase, which tends to assist sentiment towards equities, a move than can help wider business investment too, whilst living standards in Britain are now firmly on the rise, with spring 2024 PMI scores all in positive territory.
“We also reject the defeatism that we have witnessed within elements of the domestic financial services sector with respect to prospects for the London stock market“
Accordingly, the backdrop to provide a better context for investors in UK equities and so asset managers and correspondingly listed equities and issuers may have reached the low-tide point, with inflow to come. In this respect we welcome some of the recent steps to improve the competitiveness and profile of the British equity capital market, including the symbolic British ISA, which whilst no panacea, is a helpful initiative on which we hope public policy builds.
We also reject the defeatism that we have witnessed within elements of the domestic financial services sector with respect to prospects for the London stock market, preferring to acknowledge and understand the headwinds and constraints for sure but also take forward the fundamental need for British business to gain access to equity growth capital and to double-down on efforts to help raise understanding levels and so foster a better environment for equity capital markets, most notably in the key small & medium size enterprise segments across our nations.
In this respect, Shore Capital Markets believes the markets are open for business but requires a proactive approach and not sitting on our hands waiting for the doorbell to ring. We have a programme of work where we are taking the equity capital markets thesis, virtues, and vices, with like-minded folks like SME portfolio managers, the London Stock Exchange, advisors in accountancy, law and public relations but, most importantly, successful listed British companies, to reach out to those entrepreneurs and firms to build awareness, interest and so appetite to rebuild a vibrant British SME capital market. One where some of the thriving growth firms to come will themselves be constituents of the FTSE-100 in time.
Shore Capital believes in backing British business with equity capital!
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