How to revive Britain’s stockmarket

ASK BRITONS what actually goes on in the City of London and you’ll be met with a blank stare. Trading the yen and the yuan, structuring derivatives and providing the world’s financial plumbing are all money-spinners, but they barely register in the public imagination. The exception is the stockmarket. Daily news bulletins report trading on the FTSE 100 index of leading London shares. Booms and busts are charted by its gyrations. The London Stock Exchange (LSE) is the stamping-ground of giant multinationals, where city-slickers and corporate fat-cats thrash out huge deals to buy and sell the world’s companies.

Or at least it used to be. London’s high-flying stockmarket has spent the past decade tumbling back to earth. In 2006 the companies with shares listed in London were worth 10.4% of the global equity market. Today, that figure is 3.6%. London has lagged behind even the laggards: its share of Europe’s total market value has declined from 36% to 22% over the same period. The denizens of the LSE that are left look geriatric. Less than one-fiftieth of the FTSE 100’s value comes from tech companies, compared with almost 40% of the S&P 500 index of American firms. James Anderson of Baillie Gifford, one of the most successful global investors of the era, recently told the Financial Times that Britain has a 19th-century stockmarket. He is right.

One reason for Britain’s abysmal bourse is the underperformance of large British firms. Too many, from BP and GSK to HSBC and Tesco (average age 169), have dropped from the top tier of their industries owing to the chronic British disease of poor management. That has dragged down returns and made some firms vulnerable to takeovers. The entire asset-management industry, which has the job of supervising other firms, is badly run. Britain’s most valuable fund manager is now worth less than 10% of America’s largest. British pension schemes have spent years loading up on bonds and selling shares in a myopic quest to eliminate risk. They now have too little exposure to economic growth or wealth-creation.

The City has also suffered as global firms with international capital-raising options have drifted off. London’s revival after the “Big Bang”—reforms in 1986 that deregulated trading—relied in part on the stock exchange becoming a venue for mobile global businesses. Recent weeks have seen Prudential, an insurance giant, choose a share offering in Hong Kong and BHP, one of the largest London-listed companies, announce plans to have its sole primary listing in Australia. London’s aspirations to be a hub for European businesses have been dealt a blow by Brexit.

The City’s final weakness is a dearth of startups that choose to list in London. In 2005 London hosted one-fifth of the world’s initial public offerings (IPOs); today, it hosts one-twenty-fifth. A stock exchange that continually fails to attract exciting new firms will come to resemble a museum.

It is reasonable to ask how much a puny stockmarket matters. For British savers, the answer is that it doesn’t much. They can, should and increasingly are ditching their home bias and building global portfolios. As owners of superior foreign shares they may feel nostalgia for their once-great home market, but that is all. For Britain’s economy, a shrivelled stockmarket matters more. It limits the options startup founders have to expand their firms. Britain’s universities, courts and venture-capital scene make it a good place to build a business regardless. But the country’s attractions are fading.

For the City, the stockmarket matters a great deal. London remains a dominant centre for trading debt, derivatives and currencies, but equities are a crucial part of any claim to be a global financial centre. Listed firms exert a pull on other financial activities, and on the accounting and legal services that cater to them. The financial-services industry is Britain’s most successful, contributing 6% of GDP and about a tenth of tax revenue.

The worst reaction to stockmarket stagnation would be for the government to throw up defensive barriers. It must resist the temptation to veto takeovers or block delistings. An open market lets some firms leave, but it also encourages others to come. Far better to tackle the deeper causes of the malaise.

A starting-point is Britain’s corporate-governance rules for listed firms. Twenty years ago they were envied around the world, but they have since mushroomed and created a class of 3,000-odd semi-engaged and often semi-retired non-executive board directors who are rarely at the cutting edge of their global industry and often think their job is to sell firms, not prod them to invest. This interest group is entrenched, but it has presided over poor results and needs to be culled. The imperative is less red tape and more directors who understand risk-taking, not virtue-signalling.

The stockmarket can also be made more attractive by letting dual-class shares join the LSE’s premium segment. These give some shares souped-up voting rights and are popular among founders wishing to retain control. They are permitted by every one of the City’s rivals. But Britain’s befuddled legacy fund managers oppose them at home even though they are willing to buy them abroad.

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 valued infrequently. This bias should be removed. Britain’s 5,327 corporate pension schemes should be merged into a few big managers with the scale to invest more competently.

Light the blue touchpaper

The good news is that a cohort of promising firms is emerging. In the past few years venture capital has flooded into Britain, which has 34 privately held startups worth over $1bn and has created more such unicorns than France, Germany and Sweden combined. Companies like Revolut, a fintech star, are reaching critical mass. As well as deregulating corporate governance and allowing dual-class shares, the government should move ahead swiftly to make it easier for startups to hire talented foreigners and let graduates of leading universities move to Britain without a job offer. The prize is a new generation of innovative firms listing in London. Time for another Big Bang. ■