2 days ago
Long-term vision is needed to revive stock market
Call it a typical week on London's shrinking stock market: US bids for the mispriced Alphawave and Spectris at lofty premiums of 96 per cent and 85 per cent; the board of Assura recommending a cash exit at the hands of private equity rather than a merger with the listed rival Primary Health Properties; and a reminder of the lingering effect of those 'class of 2021' floats, with Pod Point agreeing to a takeover at just £10.6 million versus its £345 million listing price.
Plus, of course, the enduring absence of anything resembling a pick-me-up IPO. This week is hardly an outlier, either. The last one saw Wise, the money transfer outfit valued at almost £11 billion, declare that it would be ditching its primary listing in London to join the exodus to the US already started by the likes of Ferguson, Flutter Entertainment and Ashtead.
No question, 'de-equitisation', to use the term of Peel Hunt research chief Charles Hall, is alive and well on the London market. And theories abound over how to reverse it.
Would things be better if our stock market wasn't owned by the London Stock Exchange Group: a data business that makes 96 per cent of its money from other stuff and whose £7.9 million-a-year boss, David Schwimmer, has no financial incentive to drum up floats? Could Rachel Reeves breathe some life into the market by abolishing stamp duty on share trading, typically levied at 0.5 per cent? (Given financial services are the UK's main growth engine, there must be worse uses of £4 billion). Is there a post-Brexit hangover that needs fixing via better alignment with the EU?
Answers are proving elusive. So, it's nice to see consultants McKinsey bring a bit of nuance to the debate. In a paper, Andrew Goodman and Tunde Olanrewaju note the 'negative narratives' but suggest any fix must be as much cultural as technical: a commitment from companies, investors, regulators and the government to 'focus on growth, reinvestment and long-term outcomes'.
Take the valuation gap between UK and US companies — a ratio of enterprise value (equity plus debt) to ebitda of an average 7.7 times over here versus 13.8 in America. That, McKinsey says, is because historical growth rates in operating profit — 7 per cent in the UK versus 13 per cent in the US — 'are influencing future growth expectations'.
On top, the US index gets pulled up by 'a preponderance of highly valued outlier companies' or 'champion stocks', while the UK's big guns have delivered 'relative underperformance'. McKinsey doesn't name names but contrast Apple and Nvidia to BP and GSK.
One reason for this? That, instead of investing in the business, UK companies 'typically pay more dividends'. They account for 'around 70 per cent of UK-listed returns' versus 'less than 40 per cent in the US'. Over here, income has trumped capital growth, with investors less willing to wait. Hence, McKinsey finding 'four times as many technology companies' in the top 100 companies of the US S&P index as among Britain's leading 100 public and private companies.
Mix excess dividends, lower investment, less patient investors and slower growth and it's no shock that UK companies trade on the sort of multiples that leave them ripe for takeover — not least by private equity. Indeed, McKinsey says 'take-privates' account for '18 per cent of private equity activity' in Britain versus 1 per cent in the US. It also sees 'evidence of stronger revenue growth' in companies taken private when they're free from quarterly reporting and high dividend expectations.
None of this is a quick fix. And, of course, it would help if bankers didn't bring the likes of Deliveroo, Dr Martens and THG to the market at insane prices. But McKinsey's analysis, also calling for a more pay-for-performance culture, implies that watering down the listing rules or corralling pension funds to invest isn't the answer either. If Britain wants a thriving stock market, it's time its participants proved they are willing to back long-term growth.
How time flies in politics. Was it really only on Wednesday that Rachel Reeves was banging on about Britain being 'the fastest-growing economy in the G7'? How long will that last? A day later comes news that the UK suffered its worst monthly contraction since October 2023, with the 0.3 per cent drop in April's GDP far worse than the 0.1 per cent decline expected.
The chancellor must have known March's 0.2 per cent growth was always going to be a bit of a mirage. Manufacturers had cranked up activity to beat Donald Trump's tariffs, as April's plunge in exports to the US implies: a £2 billion drop, or the worst monthly fall on record. And, at home, property buyers had rushed to beat April's stamp duty hike, while car buyers got in ahead of changes to vehicle excise duty.
Reeves has a case for blaming 'uncertainty… in the world' for some of her problems. But two big ones are completely down to her. April was also the first month of her swingeing rise in employer taxes, aiming to raise £25 billion a year, while no one compelled her to have a tax-and-spend budget that, under her own rules, left her with fiscal headroom of a skinny £9.9 billion. The result? Every economic setback will now trigger more damaging uncertainty over what taxes she'll raise at her next budget. Hardly ideal for a 'growth' chancellor.
Finally, a business remembering its USP: just a quid for 818 stores and 16,000 staffers. And to think it costs £1.25 in Poundland for a hanging plant pot squirrel decoration. True, Gordon Brothers is also providing up to £80 million of finance. Proof that Poundland can still be pricier than advertised.
