Proactive Investors - The UK stock market is shrinking, creating numerous ramifications for the market itself, other companies and the wider economy.
Both the numbers of companies and market cap of UK equities have shrunk over the past five years and, said Charles Hall, head of research at Peel Hunt, "this really matters".
Merger & acquisition activity has continued in 2023, following a lull due to rising interest rates and funding uncertainty, with 16 transactions at least £100m announced in the year to date, 12 of them from private equity or other financial investors.
The problem for the UK is we are "not refilling the hopper", Hall pointed out in a note released to media, with just one initial public offer of note in the same period, that of CAB Payments, despite hopes for a listing resurgence having been raised in early summer.
Over the past five years the FTSE SmallCap has reduced by 61 companies, or 21%, with a 48% reduction in the FTSE Fledgling and a reduction in the AIM junior market of 97 companies or 12% over the period.
This is an acceleration of the de-equitisation trend that had already been dogging markets in recent years, with private companies delaying the jump to a public listing due either to the available money from VC and private equity.
"Reform of the listing requirements and research rules should help, but much more needs to be done to ensure that being listed is seen as an attractive option," Hall said.
The ramifications for the reduction in the listed ecosystem, he argued, include side-effects for UK economic growth affected as "small and midcap companies are generally growing whereas many of our larger companies are shrinking their workforce", and that listed companies generally have more conservative balance sheets which should aid economic resilience, as well as exits from the market leading to lower corporation tax revenues due to ownership structure changes such as those seen with Asda and Morrisons.
It would also, he says lower the attractiveness of a UK listing due to the exodus of companies in growth sectors, with a further erosion of sector peers and depth of knowledge, with the technology and healthcare sectors notable in recent years, with an impact on UK professional services that serve listed companies (such as Peel Hunt , but also broker WH Ireland as seen with its emergency fundraise, the takeover of Numis and the merger between Finncap and Cenkos).
A diminished UK market importance in global indices results in lower attention from international investors, he said, while a "circularity of negativity" sees low valuations depress liquidity and leads to companies exiting the market as long-term prospects/valuation are not being adequately recognised.
A large part of the issue, he said, was a steady withdrawal of funds from UK-facing portfolios, which has been "particularly marked" over the past two years.
While not surprising if share prices have underperformed but also "drives the perception that the UK is not open for business and depresses valuations" and "makes the UK relatively unattractive to list given the limited funds available to invest in existing businesses, let alone ones seeking to list".
Hall said the UK’s mundane economic performance in recent years does not explain the torpor in UK equity markets nor the de-equitisation trend, citing the increase in the corporation tax as "an own goal", but said the compensatory offset in capital allowances should go further to encourage more investment.
ISAs and SIPPS could include, in return for their tax free nature, a minimum level of investment in UK-listed assets, as the current lack of restrictions here "seems ludicrous", he said, while also welcoming moves to encourage pension funds to invest more in UK private assets and AIM.
Stamp duty could be removed for all smaller company share transations, as is currently with AIM, which he said is "relatively insignificant given the level of liquidity in them and acts as friction to trading", while increasing access to broker and bank research would also reduce retail investor disenfranchisement.
A sovereign wealth fund is another