Money talks: A healthy stock exchange is an integral part of a prosperous economy
Nestled in the North London suburbs, a sprawling film studio has been transformed into the Land of Oz. The set, where a new adaptation of The Wizard Of Oz prequel Wicked is being filmed, is one of more than a dozen fictional worlds that can be created at Sky Studios Elstree.
Sky, now owned by US giant Comcast, has launched its 13th and final sound stage at the site, with an opening ceremony attended by Prince Edward, Duke of Edinburgh, on Thursday. The studios will generate £3 billion of investment in the UK’s flourishing creative sector in their first five years.
Comcast is just one of the big players, both domestic and foreign, to have ploughed billions of investment into Britain in recent years. But while the atmosphere is upbeat in Elstree, the City is in danger of descending into a self-fulfilling funk.
The Square Mile has suffered a series of setbacks in the past few weeks, leading to talk of an exodus from the London stock market. This was sparked by microchip company Arm’s controversial decision to float its shares in New York instead of London, despite a campaign by Ministers and the London Stock Exchange (LSE).
Within days, several other firms said they were looking across the Atlantic. Those snubbing London include building materials firm CRH, the maker of Tarmac, and business lender OakNorth bank.
These recent defections come on top of a long-term trend for British pension funds to pull money out of UK shares and shift it into overseas stock markets as well as into Government bonds, known as gilts.
The figures are startling: in the 1990s, more than half of all shares listed on the LSE were owned by UK pension funds and insurance companies. In 2000, it was less than 40 per cent. Twenty years later that had fallen to about 5 per cent.
At first glance it might seem all of this is a problem for City slickers and remote from the daily lives of ordinary Britons. Not so. When the reputation of the UK as a good destination for investors takes a battering, it matters to us all.
A healthy stock exchange is an integral part of a prosperous real economy, providing companies with the capital to invest in growth and jobs, and giving savers the opportunity to make a good return.
When companies move on to a foreign stock exchange, that shifts their centre of gravity, so that jobs – along with research and development – are at a greater risk of moving overseas.
Foreign investors are also more likely to reap profits than British savers.
Part of the problem is the reluctance of British pension funds to invest in British shares. This means UK retirees are missing out on returns from firms on their own doorsteps.
‘All of us will get old and all of us will need pensions. At the moment, not enough of our own money is being invested in growing the UK,’ says Mark Austin, a corporate lawyer who was asked by Rishi Sunak last year to lead a review into how to make our capital markets work better.
‘Other countries do it well and there is no reason we cannot too. At the moment, there may be more teachers in Ontario [through their giant pension fund] financing UK start-ups than teachers in Aberdeen, Belfast, Cardiff or Dover.’
Austin estimates that the FTSE 100 index is undervalued by 30 to 35 per cent. Companies – especially in the technology sector – have turned to New York because they believe they can command a higher valuation on that side of the pond.
But, as last week’s meltdown at Silicon Valley Bank shows, the US is by no means an investment Nirvana. Of the UK companies that listed their shares in the US in the past decade, only three – Manchester United, tech firm Endava and healthcare group Immunocore – are in positive territory. The rest are down more than 38 per cent on average (see table above of the least successful). Whether or not the perception of London as an unattractive market is deserved, it is in danger of becoming a self-fulfilling prophecy if it is not rapidly scotched.
Royal approval: The Duke of Edinburgh at Elstree Studios
Chris Morrison, at GAM Investments, says political turmoil has not helped Britain’s image with investors. He says: ‘Historically the UK and London’s greatest strength was that it was considered a very stable place that you could rely on. We need to get back to that.’
There are measures Government can take, such as encouraging pension funds to invest more in the UK by changing rules on capital. Reforms to boardroom governance might also make London look more attractive to entrepreneurs.
But much of the solution, say experts like Austin, comes down to a change of culture and attitude.
As Amanda Blanc, the boss of insurance powerhouse Aviva, said last week, the UK finance sector needs to ‘stop talking itself down’.
Business leaders who do believe in Britain have begun to fight back. Steve Hare, head of FTSE 100 software group Sage, says: ‘We back Britain 100 per cent. We have incredible skills and talent here.’
Team GB also boasts Simon Peckham, boss of engineering group Melrose, who is floating GKN’s automotive arm in London, having considered and ruled out the US.
‘We’re a UK company, why wouldn’t we float in the UK?’ he says. ‘I know there is a downer on the UK market at the moment but it will come through. We’ve been here since 2003 and have had support for every deal we’ve ever done.’
Mark Mullen, boss of challenger lender Atom Bank, feels the same, saying: ‘Atom is a UK business serving UK customers. It’s logical we would look to list in the UK.
‘I think it would be unfortunate to see businesses choose to not list in the UK when they’ve grown their success in this country.’
Letting foreign cash plug the gap is risky
The retreat of British financial institutions from investing in UK commerce and industry has been a disaster. In the late 1990s, our pension funds and insurance companies owned more than half of UK equities. Now it is roughly 5 per cent. Instead, foreign investors have come in and now own more than half the market.
The reasons are complex, and have to do with pension funding rules that push money into gilts, the long-term impact of Gordon Brown’s raid on dividend payments back in 1997, and so on.
But the result for British companies is simple. It is harder to raise new capital here than it was a generation ago. When a company launched on the stock exchange in the 1980s and 1990s there would be a queue of institutions lining up to back it. A portion of the shares had to be set aside so that small investors would get their chance to buy some. Those days are long gone. The financial impact is that UK companies are given a lower rating than those quoted in New York. That has two effects. It makes them more vulnerable to takeovers and raises their cost of capital. In other words, it is more expensive for them to raise the money they need to invest.
The first is obvious. The string of foreign bids for UK plc is a signal that overseas predators can see value here, and they have access to cheap funds to back that judgment.
The second is equally pernicious. If it costs more to raise capital, companies invest less and take fewer risks. They have to think short-term. But it is worse than that. Because they are more vulnerable to foreign takeovers they try to keep existing shareholders onside by increasing dividends. That may be fine in the short term but it further starves them of resources to invest.
It is impossible to quantify the damage. There is no shortage of entrepreneurs, and the UK has managed to create many new businesses. We are number four, behind the US, China and India, in the number of ‘unicorns’ – companies floated with an initial valuation of more than $1 billion.
A more vibrant capital market probably would have created more, but you can’t prove it. Nor can you prove that a company raising money in New York rather than London will create jobs in the US rather than Britain, though it seems likely. What is clear is that the UK’s large corporations need to invest more to improve productivity and create prosperity for the future.