The U.K. stock market is on its “uppers,” that is to say on its last legs. It is so bad that people have stopped being in denial about it and are scrambling for solutions.
In a nutshell, the U.K. government around 2000 pushed pension funds to put their money into government bonds rather than have them have a mix of stocks and bonds to provide for the future of pension payments. There was before that, the sort of exposure to stocks that you see in other countries or even in a personal savings plan, but the government mandated pension funds had to go pretty much all bonds or else. Of course, the bonds in question were government bonds so in effect government was doing a pension raid, a common theme in the U.K., which follows the bank robber’s logic of raiding where the big money is. So rather than the citizen gaining the benefit of exposure to equities, the government got cheap lending from their pension pots, a move that would make ole Willy Sutton proud.
So the result was little to no exposure to shares in pension funds, so less pension returns for the people and a listless, soggy stock market with a major flow of funds redirected away from economy growing capital formation for enterprise and into government overspending. That produced yet more consequences for the citizen in that it suppressed yields for savers and pension holders and enforced poor equity returns for equity holders creating a systemic vicious circle.
Ironically the previous government, only a generation late, bemoaned that state of affairs, all the while depending on the situation to keep their borrowing cheap or perhaps at the margin possible. It is called financial repression and that repression is what has killed the U.K. stock market.
However, the underperformance of the U.K. stock market is so embarrassing that at least lip service is required but while it is in place it means the U.K. is open to being asset striped. This has been going on now for many years; long gone are the days when U.K. companies bought up foreign competitors. For example, U.K. builds great technology businesses, but as soon as they become significant, they get bought up for peanuts. Heaven forfend an entrepreneur gets too high a price for their business because if they do, they will risk ending up being extradited in shackles.
So recently, now the event horizon of abject failure is upon the London Stock Exchange where the CEO of the exchange itself is not even on the board of the London Stock Exchange Group, the word is out that the London market needs rejuvenating.
Here is why:
Right now the London market is just a charity shop for international companies to pop in and buy out U.K. companies tossed into the bargain bin. Great companies at half price, get them while you can.
There is little or no pension fund participation and little prospect of that changing, so beyond asset strippers, any comeback is left to the private investor.
Opps, the “private investor” is also dead as a Norwegian blue.
Gone are the days of mass interest. Individuals investing in shares is a very small niche indeed. The small-cap market is therefore also as dead as the legendary Monty Python parrot, with listings on the small-cap AIM market down from 2,000 shares to 600, with money raising down to six-figure sums that wouldn’t buy you a studio apartment in the city of London or indeed cover the cost of a prospectus or a couple of years of adviser fees.
Why? It is no mystery. If your market doesn’t go up in a generation, why would you play the stock market game? For a market to flourish the participants need to get a return; if they do not, after a time they lose interest. If they lose money as they must in such an environment, they will leave even faster. Over time, the system drains investor money out of the market and slowly yet surely turns the reservoir of capital into an empty desert. In a trading environment where the main market access point has been forced by the regulator to admit 70% of its customers lose, and those in the know are aware the average customer is churned and burned in less than a year, you simply won’t have stock market investing as a main stream activity.
Can this be turned around? Of course. Will it be turned around? I used to think so, but apparently in the next U.K. budget there will be a measure that if it is implemented, will likely drive the final nail into the cliched coffin of the London market.
A stock market is in modern parlance an ecosystem. The U.K. share ecosystem is very broken. The pension fund situation is a vast and long-standing strategy blunder that is unlikely to be reversed. The U.K. share transaction tax is another blunder that taxes the root of the system and not the fruit of the capital market. The private investor is so impeded by a whole series of mal-regulation that few take part any more, to such an extent that brokers have degenerated from a class of people that owned whole prosperous counties surrounding London, to a bunch of ragged spivs muddling along to make ends meet.
To have a good market you need a pyramid of players. You need an active private investor segment, with their small but frequent trading injecting powerfully lubricating liquidity from their mass participation. Then you need pension funds to be able to once again mix equities with debt in their portfolios, to provide huge flows of cheap capital for companies of all shapes and sizes which in turn fund wealth creation.
It is the ecosystem that is broken and impeded further.
But wait…. Is it a problem? Perhaps it is not, perhaps it is a solution. Don’t we know that stock markets are a the scourge of humanity, an evil toxic mechanism to keep down the masses? Have we forgotten that the city of London is the class enemy of the proletariat? Maybe, brother, we can celebrate a conclusion of a 100-year struggle to conquer the beast of capitalism. As my mate Karl said, “the stock exchange is not a place where real wealth is created but where the speculative parasites of society gather to suck the life out of labor.” How did we forget that? Or as Noam Chomsky, my favorite linguistic anarco-syndicalist, says, “If working people depend on the stock market for their pensions, healthcare and other means of survival, they have a stake in undermining their own interests.” How could such a saintly legend be wrong?
I often forget that when I was young, money was evil and the stock market was a kind of rich person’s vice. Yet surely now as the London Stock Market dies, no one believes it is a victory. Then again, don’t listen to what they say, watch what they do. It is being killed and it’s taken 20-plus years and it’s a culmination of actions. Perhaps it’s a victory for someone? (But not for me.)
So what is this final blow lined up for the U.K. stock market?
It’s simple. It’s a huge rise in capital gains tax. It is said capital gains tax will be aligned with income tax. In a nutshell, tax on share investing and trading profits will double for the sort of people that would and could invest in shares. This tax is said to go up to a marginal rate of 45%. So the proposition will be if you make profits from your investment in the U.K. market, which is apparently not very likely, in a market that hasn’t gone up noticeably for 24 years, then you will have about half of that win taken away.
So bang, at the stroke of a pen, away goes the chances of a private investor comeback. Clearly government redirecting its captured pension fund cash flow back to the stock market isn’t likely to happen, so any change of a sustainable renaissance appears to be zero. The only hope is a contrarian.
So many people in the U.K. tell me it’s all over for Great Britain and because of that sentiment there might be a fork in the road. When people are so forlorn it can be just the time when the bottom is reached.
I am contrarian.
I think the bottom is in for the U.K. market, but that’s because if the systemic situation is not turned around, much of the market will get taken over and that will elevate prices. This process will take another five or so years, which will be fruitful for the investor even if it means the London market continues to wither away. Then there is a chance of a Lazarus moment when the fixes that need to be made or at least a few of them get implemented. Those fixes are obvious as it simply involves implementing measures that stop liquidity being sucked from the system by participants that do not contribute to returns. That could happen but you must be truly contrarian to believe it will because fundamentally there is no evidence that that is on anyone’s agenda.
However, we have a few years of takeover frenzy ahead, so like the English of old, we mustn’t grumble.