28 June 2023

City AM: Is Brexit the real reason for London’s stock market malaise?

The City has been plunged into something of an existential panic in recent months. Fears of international decline have crystallised in the form of a listings drought and a crack squad of City grandees are scrambling to try and steady the ship.

 

But the causes of that decline, the levers that can be pulled, and whether indeed there is a decline at all, are complex issues.

A sharp drop-off in pension funds flowing into the stock market and a risk averse culture among the Square Mile’s money managers have been pointed to as reasons for the fall in the UK’s standing, as has restrictive regulation and burdensome reporting requirements.

There is also the valid point that the UK’s listings slump, while sharper than most countries, is part of a much wider global trend in which the IPO market has been shuttered amid the tumult of war in Ukraine and soaring inflation.

But one possible explanation divides opinion among City watchers more than others: Brexit.

Discount store

The battle to win listings in London is often a fight against a brutal and simple logic: a New York listing is likely to fetch a higher valuation – so why wouldn’t you? 

The attention of policymakers is therefore trained on the underlying cause of the UK’s valuation discount and why firms on our shores have proved such laggards. 

The reason du jour touted in the City is that the lack of pension fund cash flowing into the stock market has fuelled the decline in valuations, which is in turn blamed on accounting tweaks brought in around the turn of the millennium. 

Pension funds’ holding of equities has indeed plummeted since 2000. Just four per cent of the UK stock market is now held by pension funds – down from 39 per cent in 2000, according to a report from think tank New Financial. 

However, valuations did not correlate with that decline. As Fidelity fund manager Alex Wright pointed out earlier this month, much of that de-equitisation was done by 2015, and the valuation of the UK market “held up roughly the same”.

He says the elephant in the room came after that – in June 2016.

“Unfortunately, and again politicians don’t want to say this, but it’s very clear what’s caused the undervaluation: it’s Brexit,” he told Citywire in an interview. ...

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