The London Stock Exchange is facing a critical juncture, with a stark disparity between takeover bids and new listings. This imbalance is not just a numbers game; it's a symptom of a deeper issue: the market's underpricing and the pressure on boards to sell. The UK market is wide open to bidders, and it's underperforming compared to international standards. This situation is concerning because a stock market is meant to be a vital conduit for capital to reach wealth-creating assets. The current state of affairs is not healthy and requires urgent attention.
One of the key challenges is the lack of incentives for capital to flow into UK firms. The pension system, in particular, plays a crucial role in this context. Prior to 1997, the UK's dividend tax credit regime favored pension fund investment in UK companies, but this has since been eroded. The current system lacks 'home bias', which is a bias towards investing in domestic assets. This is a significant issue, as it means that UK pension funds are not fully leveraging the potential of the UK market.
To address this, there needs to be a shift in incentives and tax reliefs to channel more capital into UK firms. Andy Haldane, the president of the British Chambers of Commerce, has called for a return to the dividend tax credit regime, which would encourage pension funds to invest in UK companies. This is a fair point, as it would help to correct the 'home bias' and boost investment in the UK market.
However, the political will to implement such changes is not yet clear. The next chancellor will play a crucial role in this regard. They will need to prioritize the revival of the London market, including new listings, and take bold steps to address the current imbalance. This may involve introducing new incentives, such as a minimum UK weighting for Isa tax breaks, capital tax reliefs for entrepreneurs listing in London, and removing stamp duty on share trading.
In my opinion, the current situation is a missed opportunity for the UK. The market has the potential to be a vibrant and dynamic environment for wealth creation, but it needs the right incentives and policies to achieve this. The next chancellor has a challenging task ahead, but with the right approach, they can help to restore the London Stock Exchange to its former glory and ensure that it plays a vital role in the UK's economic future.
