Make London liquid again

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Another quarter, another blow for London’s faltering stock market. On Thursday, UK fintech Wise said it planned to switch its primary listing to New York to improve liquidity in its shares. On Wednesday, Cobalt Holdings, a metal investment company, scrapped its move to list in London, and decided to raise funding privately instead. The city’s hopes of landing Shein also appear to be on shaky ground after the fast-fashion group indicated late last month that it was shifting its focus towards Hong Kong. These fresh setbacks follow a loss of 88 companies from the London Stock Exchange last year, a post-financial crisis high.

Equity markets across the developed world are struggling. Uncertainty has sapped IPO activity everywhere. The gravitational pull of America’s vast investor base and deep capital markets also remains a force to be reckoned with, despite Donald Trump’s meddling. But for a nation as starved of growth and investment as Britain, reviving its public market is imperative. The LSE has experienced a particularly stark decline. Primary listings on the UK bourse have dropped over 40 per cent since the global financial crisis. The constant drain is self-reinforcing: as listings dry up, liquidity and investor activity thins, and on it goes.

In recent years, UK policymakers have made welcome efforts to stem the flow. Jeremy Hunt, the former chancellor, initiated sensible reforms to simplify the listings regime and make it easier for foreign issuers to list in London. His successor Rachel Reeves is trying to consolidate and mobilise Britain’s vast and sprawling pension capital in an effort to reverse the trend of UK pension funds dramatically shedding their holdings of domestic equities over the past few decades. These reforms will take time to bear fruit. Still, if the government is serious about correcting the LSE’s decline, it will need to act boldly, and quickly.

There are plenty of levers it can pull. First, it should slash the 0.5 per cent stamp duty reserve tax on the purchase of shares in UK companies. The tax saps liquidity and is already levied at a higher rate than peer nations. Cutting it would also send a clear signal to investors. Over time, the £3bn it brings the exchequer each year would probably be recouped by higher future revenues. Other targeted tax incentives could help defray the upfront costs of listing and encourage equity investments, while reforms to the tax-free individual savings account system could boost retail engagement.

Second, the negative funk around the country needs to go. Investment thrives on upbeat narratives, as the recent bump in Germany’s stock market shows. But Britain is bad at selling itself. The government’s forthcoming industrial strategy is an opportunity to outline how the National Wealth Fund and British Business Bank can support private investment in domestic companies, and to underscore the UK’s many comparative advantages, from professional services to life sciences. Creating a buzz around growth can boost equity prices. After all, as recent FT analysis found, listing in the US is no guarantee of higher valuations.

Third, longer-term policy initiatives remain important. Improving financial education is key — the British are good at squirrelling their money away, but much less adept at investing it. Barclays Bank estimates that 13mn UK adults are holding £430bn of “possible investments” in cash deposits. Financiers also continue to complain about the UK’s burdensome red tape. Streamlining and digitisation efforts will help.

Wise’s announcement is not a one-off. A shrinking stock market is both a reflection of dim growth prospects, and a cause of it. Britain can and must break the doom loop.