If there is one thing that speaks volumes about the state of the market, it’s stockbroker consolidation. London has seen a rising number of broker unions over the past year as weakening demand for the services they provide (such as IPOs and fundraisings) puts profits under pressure. Three months ago, Deutsche Bank took over Numis. FinnCap and Cenkos Securities joined forces last March. The latest merger, between Panmure Gordon and Liberum, arrives in the midst of a rocky start to the year for the market, which is being hit by troubling inflation figures – consumer price index (CPI) inflation for the year to December is at a higher than expected 4 per cent – and concern over earnings misses.
Fundamentally, though, London’s problem is a lack of capital and a dearth of buyers. Remedies and proposals to aid a revival are being worked on, but there is one more thing that can be added to the list: an individual savings account (Isa) allowance exclusively for domestic shares.
Compelling reasons for the so-called Brisa that I see are, first, the City deserves some sort of payback for the detrimental impact of Brexit, and second, a thriving equities market is not only important for investors, it’s important for everyone.
It matters for the success of listed companies and the jobs they create and sustain; for the professional services providers who support them and who use that expertise to attract global clients; for the economy, for future economic growth, and for tax revenues.
A thriving equities market is instrumental in helping firms prosper through the advantages it confers, such as giving access to cheap capital that does not need to be repaid and which can be replenished when more fuel is required; providing reassurance to customers and suppliers – through transparency around finances and high levels of scrutiny – and finally, being the means to attract and incentivise employees through share ownership. Listing can also boost a company’s wider profile. Benefits flow the other way too: since publicly listed companies have been shown to spend more on average on research and development than their private peers, they play a key role in developing intellectual property and specialist knowledge.
A third reason is that if we abnegate any responsibility to nurture and support growth companies, then the rewards that should come as they mature will flow instead to international investors.
It is clear that domestic buyers need an incentive, and with the harsh words of a Treasury select committee which last month declared the Edinburgh reforms a “damp squib” ringing in the chancellor’s ears, Jeremy Hunt might now be more inclined to create a special allowance that could help create a wave of new buyers. The “Brisa” didn’t happen in the Autumn Statement but it could turn up in the March Budget.
What form would the Brisa take? Many in the City think it odd that the same tax incentives are offered to investors in overseas companies as domestic ones, and argue that tax breaks should be directed to investment money that supports the home market.
Options include allocating a portion of the main Isa for domestic shares only, potentially with an increase in the overall annual allowance. Care would need to be taken that any new model does not engender the misleading impression that one product or portion of the account is for overseas and one for the home market – that could mean less money overall flowing into London shares.
A new model could hark back to the forerunner of the Isa – the personal equity plan (Pep), which dictated that at least half of any funds had to be invested in the UK. An even stricter example is France’s PEA plan, which has a lifetime allowance of up to €150,000 that must be invested in French or European securities with tax exemption kicking in after a five-year holding period.
Peel Hunt has made the case for a dedicated Isa for small- and mid-caps, although this might be perceived as too risky and therefore a harder sell. Others would relish the opportunity to persuade cash investors to put some of their savings in the market. Premier Miton points out that if Isa cash savers could be persuaded to invest £5,000 of their current allowance into UK companies, it would create a flow of around £200bn of new capital over a five-year period.
However, even diverting some Isa money from global to UK equities could help valuations.
Any new measure might not on its own persuade some to return to UK stocks or even dip a toe in for the first time, But it would gradually make a very significant difference.
