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Fourteen years ago the US stock market was in a sweat. A “great depression” in listings had descended. Small IPOs were practically extinct and the marketplace was failing to retain and nurture listed companies. US bankers looked enviously to London with its thriving market and growth of 15 per cent in the number of listings over a decade — a stark contrast to the US market which had suffered a near 40 per cent drop over the same period.
Oh, how the tables have turned. Now it’s the London market that’s in a depression and British market dealmakers who look enviously across the pond. It would be a gross exaggeration to say the UK stock market is on its knees, but it certainly looks like it’s been in a fight.
Overseas buyers are picking up British companies on the cheap; our Plcs are departing for the bright lights of the US and once-deep pools of capital have dried up, leaving growth companies parched. There are hardly any new arrivals.
So worrying is the situation that the government has thrown its weight behind initiatives to help the market pull itself together, including a review into London’s lack of research, commissioned by chancellor Jeremy Hunt, with City lawyer Rachel Kent awarded the task of smashing open the locks on this particular gate.
Kent’s review proposes that every listed company should be guaranteed research coverage with the reports available to investors via a central platform established by the Treasury, the stock exchange and a selected operator. Funding for the analysis could come, for example, from a levy on transactions or the government.
But what is really significant is that Kent argues that the research should be made available to retail investors.
“I recommend that the regulations relating to access to good quality investment research be reviewed to facilitate the provision of research to retail investors. At present, without access to the same research as institutional investors, too many retail investors rely on information sources such as chat rooms,” states Kent.
Research — broker notes, analysis, call it what you will — is a vital cog in keeping stock markets running smoothly. Without it, valuations, interest and liquidity all suffer as investors steer clear.
Until a few years ago, City brokers pumped out plentiful supplies of research. From the biggest blue-chips to the tiniest newcomers, companies were pored over, inspected and written about. But then a new EU Directive, Mifid II, intended to inject transparency into the market, was unleashed on the UK.
Brokers must now pay for research, rather than receiving it as part of a “bundled transaction” where the costs are not visible. This well-intentioned reform, however, alongside falling institutional interest in UK companies, means investor demand for shares has plummeted and with it the flow of companies to market.
Without the oxygen of research, growth companies struggle to raise capital. Mike Coombes, head of external affairs at PrimaryBid, a platform offering access to IPOs, links the UK’s lower levels of investment research in sectors such as tech, life sciences and smaller companies as being particularly detrimental. “It makes it more difficult for companies in these sectors to attract investors and raise capital,” he says.
It’s one reason many young companies rule out listing as an option when they are ready to scale up, ending up instead as a tasty morsel for a larger player. A study commissioned by investment manager Charles Stanley from data provider Beauhurst reveals 896 high-growth UK companies were acquired in 2022 (40 per cent by overseas buyers) compared with just 121 in 2013. On average, only 0.83 per cent of the high-growth companies monitored by Beauhurst chose to hold an initial public offering.
Retail investors were once a major stakeholder in the London market, owning around 50 per cent in the 1960s. Now they own about 12 per cent. Nick King, author of Centre for Policy Studies paper Retail Therapy, points out that savers in the UK hold around £1.8tn in cash, money that is often locked away for years but could be invested for vastly higher real rates of return. Held as cash, inflation is chomping through this asset pile.
Despite warnings to the contrary, active investing is not a high-risk activity best left to the rich. Done the right way, with proper care and preparation, it can profit the moderately well-off too.
But barriers are erected at every turn to keep retail investors “safe” and one of these is keeping share research out of their hands. That makes the situation even worse: you can buy shares in a new listing but you cannot read the research that would enable you to assess the risks! Even “company-friendly” research can be helpful because it will contain rich factual information, comments former City analyst Robin Hardy.
Enabling retail investors to make better informed choices is a no-brainer and their capital will help our fledgling companies to thrive.
It will be months before we know how much of Kent’s plan will be implemented but we should all be fervently hoping the outcome is the right one for individuals, the stock market and the economy.
Rosie Carr is the editor of Investors’ Chronicle