London’s shrinking stock market

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It has been a particularly bad year for the London Stock Exchange. A total of 88 companies have delisted or transferred their primary listings from the market, with just 18 taking their place. That marks its biggest net outflow of companies since the financial crisis. New listings on the UK’s main market are also set for their weakest annual run in 15 years. French broadcaster Canal+ did list on the LSE on Monday, in what UK chancellor Rachel Reeves described, somewhat wishfully, as “a vote of confidence in the UK’s capital markets”. By close, the company’s value was down 20 per cent.

The dismal year hits home just how far the London stock market has fallen, and the size of the task in reversing its long-term decline. Primary listings on the UK bourse have dropped over 40 per cent since 2007, and the FTSE 100 has moved mostly sideways since the Brexit referendum. Part of the underperformance comes from Britain’s industrial mix, orientated towards energy and mining, not the higher-growing tech sector.

But there are deep-seated issues, too. Thinning liquidity makes it hard to compete with America’s deep capital markets and fast-growing economy. Big names from a range of industries, including Ashtead, Flutter and CRH, have either made plans to move their main listing from the FTSE 100 to New York or have already done so in the past 18 months. But even emerging markets, such as India and the UAE, are gaining on the UK as a listing destination, which highlights wider issues around the investment case for Britain. Takeovers by private equity bidders have also depleted London’s stock markets.

British authorities have rightly raised efforts to revive the LSE. After all, a thriving public market is an important source of financing for companies. Jeremy Hunt, the former chancellor, made sensible reforms to simplify the listings regime and make it easier for foreign issuers to list in London. Reeves has made a welcome push to consolidate the UK’s vast and sprawling pension capital, to help incentivise investments in higher-risk equity assets; pension funds have dramatically shifted their portfolios away from UK equities over the past decade, sapping market liquidity in the process. The new reforms will take time to bear fruit.

In the near term, the government could give a quick boost to UK stocks by slashing the 0.5 per cent stamp duty reserve tax on the purchase of shares in UK companies. The tax raises the cost of equity for companies, depresses share prices, and is levied at a higher rate than peer nations. It would also be gradually recouped by higher future revenues.

Still, anyone looking for a magic tax or regulatory tweak to solve the LSE’s woes will be disappointed. The state of London’s stock market reflects a deeper malaise in the UK’s business environment that needs fixing. In recent years, political turbulence has hindered the case for listing, investing and expanding in Britain. The newish Labour government’s large majority does offer a stable platform to build on. And the UK has many comparative advantages — from financial services to life sciences — that can attract listings and investment opportunities.

Unfortunately, the government has already erred by lumbering companies and wealth creators with hefty taxes in its Autumn Budget. It must now act quickly to regain business confidence. In the new year, investors will want to see progress on Labour’s lauded planning reforms, infrastructure projects and broader growth strategy. Only by developing a convincing business case for Britain can the government give the London stock market more than a fleeting chance of revival.