Amid the gloom beset upon the London stock market, it’s always reassuring to hear an authoritative voice pipe up and exclaim that reports of the London stock market’s death “are greatly exaggerated!” as Shore Capital Markets’ director Clive Black did today.
There is no ignoring the problems facing listed British companies, predominantly their persistently low valuations that have left easy takeover targets ever since the period of Covid-era funny money turned into harsh monetary tightening.
Among the flurry of take privates, delistings and migrations to bourses elsewhere, there are now 28% fewer businesses listed on the London Stock Exchange than there were ten years ago.
That hurts whichever way you spin it, and Black agreed that “the London equity capital market has had much better times than has recently been the case”.
Furthermore, cash redemptions among UK equity funds within the asset management sector do not appear to be slowing down.
This is leading to lower liquidity, leading to de-equitisation via buybacks, leading to lower liquidity and so on. (Publicly listed companies often choose to buy back their shares to reduce the float as a way to manage liquidity issues and stabilise share prices.)
“The present cycle clearly needs to be broken if equity capital markets are to support economic growth, with greater liquidity the lifeblood of future activity,” stated Black.
So when does the good news start, you might be asking?
A favourable repricing of equity compared to debt for publicly listed entities could be on the horizon when interest rates normalise to the low-to-mid-single digit percentage range, “as monetary policymakers lick their wounds from a material miscalculation of inflationary forces in the early 2020s”.
Provided they learn their lesson (a big if, granted), central banks across the Western world are unlikely to pivot back to a zero interest rate policy (ZIRP) once this hiking cycle turns dovish, at least for the foreseeable future.
Burdensome government regulation has been less than helpful in promoting the UK as an attractive destination for investment, hence why Shore Cap’s chairman Xavier Rolet has thrown his weight behind Solvency II reforms (or relaxations, to be precise) governing UK insurance and pension funds investing in equities.
He has also promoted Financial Transaction Tax reforms and other easings of regulatory policies.
“However, such matters are not the nub of why we believe that equity capital markets will remain key to backing British business,” said Black.
“The reality is that the British economy needs firms that will provide solutions to ongoing problems, develop products and services that enhance society, and in doing so generate the wealth and employment that will go on to provide the incomes, dividends and gains that feed the economy and generate tax revenues to fund public services.”
With Shore Cap expecting the cycle of liquidity outflows to recede and interest rates to start coming down to a manageable rate, Black rejects “the defeatism that we have witnessed within elements of the domestic financial services sector with respect to prospects for the London stock market.
“It’s better to “acknowledge and understand the headwinds and constraints… but also take forward the fundamental need for British business to gain access to equity growth capital and to double-down on efforts to help raise understanding levels and so foster a better environment for equity capital markets, most notably in the key small and medium size enterprise segments across our nations”.
Hopefully, then, will the tide of UK delistings begin to swell in the right direction once more.
