They say that two is a coincidence, but three’s a trend. So when Softbank opted for a US rather than UK listing for Arm last week, and building materials company CRH announced it was switching its own listing to the US – shortly after similar noises were made by gambling group Flutter – there was an outpouring of angst.
In fairness, this outbreak of evacuations is only the latest, most visible manifestation of a problem that has long lingered. The size of the UK equity market has shrunk materially this century, and there are several other recent examples of departures across the Atlantic: Ferguson and Abcam, for instance.
But we should be sure not to overstate the problem. News that Shell had considered a similar move also emerged last week, yet the company is, after all, staying put. While stasis is hardly a feather in the UK’s cap, some changes have worked in its favour: Shell scrapped its dual share structure and moved its HQ from Amsterdam to London in 2021; Unilever did something similar a year earlier. And the UK isn’t the only one struggling to compete with the draw of the US; drowned out by the hubbub this month is the news that Germany’s most valuable business, industrial gas group Linde, had completed its departure from the Dax in favour of its existing US listing.
The US’s more liquid stock markets, which also tend to place a higher valuation on tech and biotech businesses, in particular, are now complemented by an industrial policy that employs both carrot and stick. It is offering a range of subsidies to businesses backed by a ‘buy American’ philosophy. For companies such as CRH, three-quarters of whose cash profits now come from the US, there is a need to make itself look more attractive to Uncle Sam.
The domestic market's problems, while far from fatal, are longer in the tooth, such as the falling away of institutional investment.
What, then, is to be done? Proposals abound. But relaxing certain listings rules – specifically, those around related-party transactions that reportedly put off Softbank – would smack of desperation, and would hardly be of benefit to investors. And the idea that pension funds can be encouraged to invest en masse in early-stage growth companies is still improbable. Schemes are shying away from investing in the very largest equities, let alone start-ups. The average UK defined-benefit (DB) pension fund’s allocation to equities has fallen from 50 to 5 per cent since 2000.
What’s more, the recent rise in gilt yields has meant many more DB schemes are now marching towards their desired goal of an insurer buyout – which, from an asset allocation perspective, effectively means an even more risk-averse strategy.
That leaves defined-contribution schemes. There is more scope for change here, including simple tweaks such as ensuring default funds for younger employees are sufficiently growth-focused. Bigger overhauls, such as changes to DB pension accounting standards that have accelerated institutions’ exit from equities, are clearly a much harder ask.
Away from pensions, other regulatory changes might include ending the tax penalties associated with equity financing, and some of the initiatives announced by the Hill Review. That review was two years ago now, and progress has been painfully slow. Now come the Edinburgh reforms – a mooted ‘Big Bang 2.0’ that we’ll examine in more detail later this month.
These changes should be accompanied by something bigger. The stock market isn’t the economy, but ultimately attracting more investors requires more growth. In the US and Europe, that growth is increasingly being stimulated by governments focused on issues such as energy security, the energy transition and the safeguarding of key technologies. In the UK, companies in sectors ranging from semiconductors to renewable power and life sciences are calling for the government to deliver on its promises, commit more, or make expansion easier.
It’s in their interests for that to happen, but it’s also in the interests of the country as a whole. As Hermione Taylor writes, next week’s Budget is likely to see the Office for Budget Responsibility downgrade its medium-term growth estimates again. That shouldn’t be used as a reason to shy away from ambitious policies – quite the opposite. The UK market will always offer plenty of distinct opportunities for investors. Index performance over the past year proves that. But it will be harder for the country to fight its corner with one hand tied behind its back.
