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Fourteen years ago, the U.S. stock market was sweating. A “great depression” in quotes had occurred. Small IPOs had all but disappeared and the market was failing to retain and nurture listed companies. American bankers looked enviously at London, with its thriving market and its 15 percent growth in listings over a decade – a stark contrast to the American market which had suffered a decline of almost 40 percent over the same period.
Oh, how the tables have turned. Today, it is the London market which is in depression and British negotiators who are looking with envy at the other side of the Atlantic. It would be an exaggeration to say that the UK stock market is on its knees, but it certainly appears to have put up a fight.
Foreign buyers acquire British companies cheaply; our corporations are moving to the bright lights of the United States and once-abundant capital reserves have dried up, leaving growing businesses dry. There are practically no new arrivals.
The situation is so worrying that the government has backed initiatives to help the market recover, including a review into London’s lack of research, commissioned by Chancellor Jeremy Hunt, and City lawyer Rachel Kent, was given the task of breaking the locks. on this particular door.
Kent’s study proposes that each listed company should be guaranteed research coverage with reports accessible 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 transaction levy or from the government.
But what’s really significant is that Kent argues that research should be made available to retail investors.
“I recommend that regulations relating to access to good quality investment research be reviewed to make it easier for retail investors to provide research. Currently, without access to the same research as institutional investors, too many retail investors rely on information sources such as discussion forums,” says Kent.
Research – broker ratings, analysis, whatever you want to call it – is an essential cog in the proper functioning of stock markets. Without this, valuations, interest rates and liquidity will suffer as investors stay away.
Until a few years ago, City brokers produced abundant research reserves. From the biggest blue chip companies to the smallest newcomers, companies have been reviewed, inspected and commented on. But then a new EU directive, Mifid II, intended to inject transparency into the market, was launched in the UK.
Brokers now have to pay for research, rather than receiving it in a “bundled transaction” whose costs are not visible. However, this well-intentioned reform, alongside declining institutional interest in UK companies, meant that investor demand for shares fell and, with it, the flow of companies to the market.
Without the oxygen of research, growing companies struggle to raise capital. Mike Coombes, head of external affairs at PrimaryBid, a platform providing access to IPOs, believes lower levels of investment research in the UK in sectors such as technology, life sciences and small businesses are particularly harmful. “This makes it more difficult for companies in these sectors to attract investors and raise capital,” he says.
This is one reason why many young companies rule out listing when they are ready to expand, instead ending up as a tasty morsel for a bigger player. A study commissioned by investment manager Charles Stanley from data provider Beauhurst reveals that 896 high-growth UK companies were acquired in 2022 (40% of them by foreign buyers), compared to just 121 in 2013. On average, just 0 .83% of high-growth companies have been acquired. the companies followed by Beauhurst have chosen to proceed with an IPO.
Retail investors were once a major player in the London market, owning around 50 percent in the 1960s. They now own around 12 percent. Nick King, author of the Center for Policy Studies article Retail Therapy, points out that UK savers hold around £1.8 trillion in cash, money that is often stashed away for years but could be invested for much higher real rates of return. Kept in the form of liquidity, inflation eats away at this pile of assets.
Despite warnings to the contrary, active investing is not a high-risk activity best left to the rich. Done in the right way, with proper care and preparation, it can also benefit the moderately well-off.
But barriers are being erected at every turn to ensure the “safety” of retail investors, and one of them is keeping stock research out of their control. This makes the situation even worse: you can buy shares in a new listing but you cannot read the research that would allow you to assess the risks! Even ‘business-friendly’ searches can be useful as they will contain rich factual information, comments former City analyst Robin Hardy.
Enabling retail investors to make more informed choices is a no-brainer and their capital will help our young businesses prosper.
It will be months before we know how well Kent’s plan will be implemented, but we should all fervently hope that the outcome is good for individuals, the stock market, and the economy.
Rosie Carr is the editor-in-chief of Investors’ Chronicle
