There is only one cure for Britain’s sickly stock market (2024)

So many things in Britain today need fixing that the rapid decline in our equity markets as a place to raise capital and trade shares might seem a relatively unimportant matter coming a long way down any list of priorities.

Yet this would be precisely the wrong way of looking at it, for the stock market’s downfall is a manifestation of some of the most deep-rooted deficiencies in the UK economy – in particular, woefully poor levels of saving and investment.

In a well-balanced economy, last week’s news that the Wiltshire-based logistics company Wincanton is to be swallowed up by the French behemoth CMA CGM Group would scarcely merit a mention.

I cite it only because Wincanton is part of an increasingly destructive trend – the growing number of companies leaving UK publicly listed markets for private equity, overseas ownership, and/or overseas listings.

Small wonder that the UK IPO market is dying on its feet. It’s not just paralysis in government, an uncertain economy, an impossibly risk averse regulator, and the corrosive effects of cultural aversion to competitive levels of executive pay; it’s also an acute absence of demand from investors, creating a doom loop of negativity.

Vendors cannot achieve the valuations they want, sparking more selling pressure, a further decline in liquidity, poorer valuations still, and a search for better returns elsewhere.

The position already looks bad enough, but for a harbinger of worse to come look no further than the Irish stock market, which even five years ago appeared to be in relatively good shape but has since suffered a calamitous decline in listings and market capitalisation.

Recent departures include the cement giant CRH and the Paddy Power gambling group Flutter Entertainment.

The same pattern is being repeated here in the UK. There is very little chance as things stand of the downward pressures abating.

The Government’s much trumpeted Edinburgh Reforms are very unlikely in themselves to turn the page, and although it’s fair to say that the Treasury has at least begun to recognise the peril we are in, it’s not yet prepared to make the bold leap in mindset and action needed to correct the problem.

I cannot help but think of the parallels with last week’s series of warnings from the military about the need to prepare for war. Never mind Ukraine, Putin’s sabre rattling in the Baltic is the loudest possible of wake-up calls.

Yet the country and its political masters are not even remotely prepared for the huge increases in defence spending needed, or the sacrifices that will have to be made in other forms of consumption to make it possible.

As a proportion of GDP, UK defence spending has declined steadily from 7pc in the 1950s to little more than 2pc today. Even at the time of the Falklands war it was around 4pc. This decline has made way for an equally dramatic surge in entitlement and healthcare spending.

Restoration even to the levels that ruled in the 1980s is going to require either a further significant rise in the tax burden and or deep cuts to welfare. Either way, it’s going to eat painfully into current consumption.

The same shift in mindset is required to address the nation’s wider savings deficit. The numbers here are stark. As a proportion of national income, Britain has one of the lowest savings rates – the part of disposable income that is available to acquire financial and non-financial assets – in the OECD at just 1.7pc.

This compares with 6.1pc for the European Union, and 9.1pc for Germany. Like Aesop’s grasshopper, we prefer to live high on the hog and trust in the future to take care of itself.

In the US, the savings rate is admittedly even lower, but the US still has the luxury of a world that seemingly wants nothing more than to finance the American penchant for consumption.

Alas, this is not true of the UK. We long ago lost the “exorbitant privilege” of dominant reserve currency status.

In any case, the read across to “gross capital formation”, a measure of what’s being invested in the UK economy, is equally concerning. No other major advanced economy invests as little as we do; even the Russian Federation invests more of its GDP than us.

It is therefore hardly surprising that the stock market should suffer. Our biggest one time source of evergreen capital, the nation’s once sturdy defined benefit pension fund sector, has been hijacked by the Government to feed its insatiable appetite for debt.

Pursuit of liability matching strategies has shrunk pension fund exposure to UK equities all the way down from 40pc just 20 years ago to less than 4pc today.

If you’ve got an exciting IPO to market, don’t bother calling on Britain’s largest depository of savings. If it’s not the Debt Management Office on the line with news of another lorry load of gilt issuance, they won’t be interested.

Any investment strategy that relies wholly on the Government’s ability to keep servicing its debts from future tax revenues might seem just as risky as the rollercoaster of the stock market, if not rather more so when the productive part of the economy is dying from neglect. But that’s not the way the actuaries look at it.

If the pension funds aren’t buying, it leaves just retail and overseas investors to provide support, but they too seem determined to give UK listed equities the cold shoulder.

Who can blame them, when there are much better performing indices overseas to chase?

As a sweeping generalisation, the same goes for overseas investors, many of whom have yet to be convinced that Brexit was anything other than a wanton act of economic self-harm. A vicious circle of decline has been established, where selling begets more selling.

To restore international faith in the UK stock market we first need to help ourselves, and that means devoting a much greater proportion of GDP to savings and investment.

The consequent shift away from consumption requires a complete change in mindset and culture, for which there appears little or no appetite among the political class let alone the wider population.

The public say they want honesty from their politicians. Experience suggests otherwise. The party that promises only “blood, toil, sweat and tears” is unlikely to excel at the ballot box.

Fiddling around with half measures such as the idea of British-only Isas – already mired in Downing Street infighting – isn’t going to significantly shift the dial.

What’s required is much more radical action, such as making all UK investment capital gains tax-free, paid for by taking the axe to elements of the entitlements budget.

Electoral suicide, maybe, but the way things are going we won’t even have an economy left to save, let alone a stock market.