ASK BRITONS what’s really going on in the City of London and you will be greeted with a blank stare. Trading the yen and yuan, structuring derivatives, and providing global financial plumbing are all sources of money, but they hardly fit into the public imagination. The exception is the stock market. The daily newsletters report on the exchanges on the FTSE 100 index of major London stocks. The arrows and the busts are traced by its gyrations. The London Stock Exchange (LSE) is the testing ground for giant multinationals, where city dwellers and big corporate cats make huge deals to buy and sell companies around the world.
Or at least it was. London’s high-flying stock market has spent the last decade falling back to earth. In 2006, companies whose shares were listed in London represented 10.4% of the global equity market. Today that figure is 3.6%. London is even lagging behind: its share of the total value of the European market has fallen from 36% to 22% over the same period. The inhabitants of the LSE which are left to geriatric air. Less than a fiftieth of FTSE The value of 100 comes from technology companies, compared to nearly 40% of S&P Index 500 of American companies. James Anderson of Baillie Gifford, one of the most successful global investors of the time, recently told the Financial Time that Britain has a 19th century stock market. He is right.
One of the reasons for the UK stock market abyss is the underperformance of large UK companies. Too much PA and GSK To HSBC and Tesco (average age 169), have fallen out of first place in their industries due to chronic British disease of mismanagement. This weighed on returns and made some companies vulnerable to takeovers. The entire asset management industry, which is responsible for overseeing other businesses, is poorly managed. Britain’s most valuable fund manager is now worth less than 10% of America’s largest. UK pension plans have spent years loading up on bonds and selling stocks in a myopic quest to eliminate risk. They are now too little exposed to economic growth or wealth creation.
The city has also suffered from the demise of global companies with options for raising international capital. London’s revival after the “Big Bang” – the 1986 reforms that deregulated trade – was based in part on the stock exchange becoming a place for mobile global businesses. In recent weeks, Prudential, an insurance giant, has chosen an equity offering in Hong Kong and BHP, one of the largest listed companies in London, announces its intention to have its only main listing in Australia. London’s aspirations to become a hub for European business have been shaken by Brexit.
The City’s latest weakness is the shortage of startups choosing to register in London. In 2005, London hosted a fifth of the world’s first public offerings (Initial Public Offerings); today, it welcomes a twenty-fifth. A stock exchange that still fails to attract exciting new business will look like a museum.
It is reasonable to wonder how much a puny stock market matters. For UK savers, the answer is that it doesn’t do much. They can, should and increasingly abandon their national preference and build global portfolios. As owners of high-quality foreign stocks, they may feel nostalgic for their old domestic market, but that’s it. For the UK economy, a shrunken stock market is more important. This limits the options available to startup founders to grow their business. UK universities, courts and the venture capital scene make it a good place to start a business regardless. But the attractions of the country are fading.
For the City, the scholarship counts a lot. London remains a dominant center for debt, derivatives and currency trading, but stocks are a crucial part of any claim to be a global financial center. Listed companies exert influence over other financial activities, as well as over the accounting and legal services provided to them. Britain’s most prosperous financial services industry, contributing 6% of GDP and about a tenth of tax revenue.
The worst reaction to the stock market stagnation would be for the government to erect defensive barriers. He must resist the temptation to veto takeovers or block radiation. An open market allows some businesses to leave, but it also encourages others to come. Better to tackle the root causes of the discomfort.
UK corporate governance rules for listed companies are a starting point. Twenty years ago they were envied around the world, but they have since multiplied and created a class of around 3,000 semi-engaged and often semi-retired non-executive directors who are rarely at the forefront of their industry. global and often think their job is to sell companies, not to get them to invest. This interest group is ingrained, but it has presided over poor results and must be eliminated. The imperative is less paperwork and more directors who understand risk-taking, not virtue-signaling.
The stock market can also be made more attractive by letting dual-class stocks join the LSEhigh-end segment. These give certain shares inflated voting rights and are appreciated by founders wishing to retain control. They are authorized by each of the Town’s rivals. But puzzled British fund managers oppose it at home, even if they are prepared to buy them overseas.
Reform of the asset management sector is long overdue. Actuarial rules create a perverse incentive for companies to hold debt and private assets, the volatility of which is masked because they are rarely valued. This bias must be removed. The 5,327 UK company pension schemes should be merged into a few large managers with the scale needed to invest more competently.
Turn on the blue touch paper
The good news is that a cohort of promising companies is emerging. In recent years, venture capital has flocked to Britain, which has 34 private startups worth over $ 1 billion and has created more such unicorns than France, Germany. and Sweden combined. Companies like Revolut, a fintech star, are reaching critical mass. In addition to deregulating corporate governance and allowing double-class stocks, the government should move forward quickly to make it easier for startups to hire talented foreigners and let major university graduates settle in. in Great Britain without a job offer. The award is a new generation of innovative companies listed in London. It’s time for another Big Bang. ■
This article appeared in the Leaders section of the print edition under the title “From the Big Bang to the Whimper”