“We are, it is admitted, the financial centre of the world,” said the chairman of the Union Bank of London in 1903. Back then, the City of London was the world’s banker, and its stock exchange was worth as much as the New York and Paris exchanges combined. Today, the stock market is shrinking at its fastest rate since 2010. While the mining company Glencore’s recent decision to retain its London listing provided a temporary boost, it won’t stem the tide. Companies are increasingly ditching London and moving to Europe and the US.
Rachel Reeves hopes to revive the exchange by pushing stock ownership, encouraging people to become their own portfolio managers. The Confederation of British Industry (CBI) has its own proposals, including tax breaks and looser bonus rules. Both of these plans are based on deregulation, and neither addresses the underlying problem: Britain’s ailing stock market is both a cause and consequence of stubbornly low business investment and a broken growth model.
In theory, the stock exchange gives companies access to capital, which they invest in their businesses, making those more productive and causing the economy to grow. Pension funds and savers who buy their shares gain from this growth (as do workers, whose wages are supposed to go up as productivity rises). But the stock exchange isn’t providing enough access to capital, and listed companies aren’t investing to boost growth. British pension funds, once major buyers of UK equities, have retreated. Many have shifted to gilts, or headed to the US to take advantage of the tech boom. In 1997, UK pension schemes allocated 53% of their assets to UK equities; today, that figure just is 6%.
British businesses have grown more slowly. At the same time, their shareholders have pushed aggressively for dividend payments, producing a toxic spiral of stagnant growth and diminishing prosperity. Instead of boosting investment, this has redistributed wealth upwards. Dividend payments grew nearly six times faster than real wages between 2000 and 2019, and British companies now spend less on research and development than their European equivalents. The dividend yield is about twice as high for UK shares as it is for US stocks. The British economy excels at rentierism – less so at the investment that would boost productivity.
Firms listed in Britain are consequently vulnerable to foreign and private equity takeovers, while successful companies are heading overseas to raise money. The British semiconductor firm Arm was worth £24bn when Japan’s Softbank bought it in 2016. Despite desperate lobbying from politicians, Arm couldn’t be persuaded to list its shares in London when it went public. Instead, the UK-based company listed on the US Nasdaq, and has since gained approximately £85bn in value, most of which accrued to investors overseas.
The CBI wants Ms Reeves to coax pension funds into investing more in British businesses. An influx of pension capital would help, but it isn’t going to fix an economic model skewed towards wealth extraction. Public investment must form part of the solution. Government-backed regional banks could lend money to upstart companies outside London. Ms Reeves should also do more to force existing firms to invest in productive activities. Taxes on share buybacks would be a good starting point. So too would mandating employee directors on company boards. But such proposals would require a sense of political imagination – something that the current government doesn’t seem to possess.
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