The U.K.’s public equity markets have endured a “pretty brutal” past few decades, but it’s the smaller listed companies that have been hit hardest of all.
The number of public companies with a market value under £1 billion ($1.3 billion) has dropped by 31% over the past 20 years, which translates as a net loss of 600 companies, but it is possible to reverse the sector’s “doom loop,” a think tank said on Thursday.
A report published by New Financial in partnership with Abrdn, Euroclear, Winterflood and the Quotes Companies Alliance (QCA) is calling on the government to extend the exemptions from stamp duty, a tax on stock trading, to include shares of all the companies outside of the FTSE 100.
The report comes just weeks before Finance Minister Rachel Reeves presents her first budget on October 30. Although her party had pledged to refrain from raising income tax, national insurance and value added tax—the three biggest sources of tax revenue—she and her colleagues have repeatedly said the government needs to fill a £22 billion hole in its finances.
The think tank acknowledged that making recommendations on tax and incentives a few weeks before a budget is “perhaps foolish,” but asset manager Abrdn pointed to the wider importance of the small-cap sector.
“Smaller companies play a vital role in the U.K. economy by creating jobs, channeling investment into a wide range of sectors, pushing boundaries of innovation and driving technological advancement,” said Sir Douglas Flint, chairman of Abrdn.
“If policymakers consider what can be done to boost investment in the UK generally, we cannot afford to ignore U.K. small-caps.”
New Financial said the biggest challenge for smaller listed companies has been the collapse in demand from the U.K.’s institutional and retail investors. Pension funds have cut their allocations to U.K. equities from 40% to less than 5% over the past 20 years. And households directly owning stocks has halved in the same period from 22% to 11%.
Markets like Australia, Canada and Sweden have capital markets where smaller listed companies have been thriving, and they serve to illustrate that “a concerted effort across government, regulation and the industry can reverse the doom loop and revitalize what should be a vibrant component of U.K. capital markets” the think tank said.