Can Andy Burnham save the UK’s stock market?
Undervalued UK firms are being bought out by overseas institutions, and a lack of IPO activity means London's market is shrinking
Andy Burnham will have a lot of important jobs when he steps into Number 10. One of them will be to try to fix the UK’s apparently broken stock market.
The persistent undervaluation of UK stocks may provide buying opportunities for investors, but it seems to be overseas institutions that are taking advantage, rather than the country’s own DIY investors.
EasyJet (LON:EZJ) is the latest British company to be the subject of an opportunistic takeover bid from a foreign private equity firm. It is unlikely to be the last.
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Analysis from stockbroker Peel Hunt showed there have been £165 billion worth of takeover bids for British companies since the start of 2023. In that time, there have been 11 initial public offerings (IPOs) with a combined value of £6 billion. That amounts to a massive shrinking in value of the UK market.
“To say that the UK has a problem in retaining its companies and listing new ones would be a massive understatement in our view,” Charles Hall, head of research at Peel Hunt, stated in a report.
“The situation on the London market is now so serious that it requires bolder interventions to save our stock market,” said Richard Stone, chief executive of the Association of Investment Companies (AIC), an industry body that represents the UK’s investment trusts.
Why aren’t British investors buying their own stock market, and is there anything Burnham can do to change that?
Why aren’t Brits investing?
Part of the problem is the is a lack of investing culture in the UK. The Starmer government attempted to solve this by launching a retail investment campaign, fronted by the mascot Savvy the Squirrel.
It doesn’t seem to have worked, and the disruption in Downing Street appears to be making Brits even more cautious. Research from investment platform IG shows that nearly one in four British investors (23%) have changed their investment allocation as a result of political uncertainty.
“Rather than simply expressing concern about the outlook, many retail investors are actively reassessing where they want their money invested,” said Chris Beauchamp, IG’s chief market analyst.
UK investors have multiple sources of uncertainty to contend with. As well as domestic political upheaval, there is also the persistent geopolitical tension in the Middle East as well as the spectre of persistent inflation.
“That doesn't necessarily mean investors are abandoning risk altogether,” said Beauchamp. “Many continue to look for long-term growth opportunities, but confidence in UK markets will depend on greater political and economic certainty over the months ahead.”
What could Burnham do in order to save the UK’s stock market?
Industry leaders have called on Burnham to reform the tax system around UK stocks in order to encourage domestic investors to buy the country’s shares.
“Abolishing stamp duty altogether would give the biggest financial return to the UK economy by encouraging more investors to buy UK equities and drive economic growth,” said the AIC’s Stone, who also called for reforms to the rules that impact investment trusts and venture capital trusts (VCTs).
He highlighted that investment trusts are currently subject to “onerous double taxation” as they pay stamp duty when they buy UK-listed shares, and investors are then charged stamp duty when they buy the shares of the trusts themselves.
“It’s vital to support businesses at an earlier stage of their growth journey by reversing the decision to reduce tax relief on VCTs,” said Stone. “The cut in tax relief from 30% to 20% is expected to lead to a sharp decline in funding for VCTs, which provide the capital to growing businesses as they scale up and prepare to list on the stock market.
“If we don’t support our home-grown companies, we reduce the chance of seeing successful IPOs on our domestic market,” Stone continued. “We will also continue to see home-grown businesses head overseas, leading to the UK missing out on job creation and wealth.”
