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As Investors Avoid London… Why Should We ALL Back Britain?

Money talks: a healthy stock market is an integral part of a thriving economy

Located in the north London suburbs, a sprawling film studio has been transformed into the Land of Oz. The set, where a new adaptation of Wicked, the prequel to The Wizard of Oz, is filmed, is one of more than a dozen fictional worlds that can be created at Sky Studios Elstree.

Sky, now owned by US giant Comcast, inaugurated its 13th and final sound stage at the site, with an opening ceremony attended by Prince Edward, Duke of Edinburgh, on Thursday. The studios will generate a £3bn investment in the UK’s thriving creative sector in its first five years.

Comcast is just one of the big players, both domestic and foreign, that have poured billions into Britain in recent years. But while the mood is upbeat in Elstree, the town is in danger of slipping into a self-fulfilling state of depression.

The Square Mile has suffered a series of setbacks in recent weeks, leading to talk of an exodus from the London stock exchange. This was sparked by the controversial decision by microchip firm Arm to float its shares in New York rather than London, despite a campaign by Ministers and the London Stock Exchange (LSE).

Within days, several other companies said they were looking across the Atlantic. London snubs include building materials company CRH, the maker of Tarmacs and commercial lender OakNorth Bank.

These recent defections add to a long-term trend by British pension funds to move money out of UK stocks and into foreign stock markets, as well as into government bonds, known as gilts.

The numbers are staggering: in the 1990s, more than half of all shares listed on the LSE were owned by UK pension funds and insurance companies. In 2000, it was less than 40 percent. Twenty years later, it had fallen to around 5 percent.

At first glance, it might seem that all this is a problem for city dwellers and removed from the daily life of ordinary Britons. Not so. When the UK’s reputation as a good destination for investors takes a hit, we all care.

A healthy stock market is an integral part of a thriving real economy, providing businesses with the capital to invest in growth and jobs and giving savers the opportunity to earn a good return.

When companies move to a foreign stock exchange, that shifts their center of gravity, so jobs, along with research and development, are at greater risk of moving overseas.

Foreign investors are also more likely to profit than British savers.

Part of the problem is the reluctance of UK pension funds to invest in UK stocks. This means that UK retirees are missing out on business returns on their own doorstep.

We will all grow old and we will all need pensions. At the moment, not enough of our own money is being invested in UK growth,” says Mark Austin, a corporate lawyer who was asked by Rishi Sunak last year to lead a review on how to make our capital markets work. better.

‘Other countries do it well, and there’s no reason why we can’t do it too. Right now, there may be more teachers in Ontario (through their giant pension fund) funding UK start-ups than there are teachers in Aberdeen, Belfast, Cardiff or Dover.’

Austin estimates that the FTSE 100 index is 30 to 35 percent undervalued. Companies, especially in the technology sector, have turned to New York because they believe they can get a higher valuation on that side of the pond.

But, as last week’s collapse at Silicon Valley Bank shows, America is by no means investment nirvana. Of the UK companies that have listed their shares in the US in the past decade, only three – Manchester United, tech firm Endava and healthcare group Immunocore – are in positive territory.

Royal Assent: The Duke of Edinburgh at Elstree Studios

Royal Assent: The Duke of Edinburgh at Elstree Studios

The rest are down more than 38 percent on average (see the least successful chart above). Whether the perception of London as an unattractive market is deserved or not, it risks becoming a self-fulfilling prophecy if it is not quickly thwarted.

Chris Morrison of GAM Investments says the political turmoil has not helped Britain’s image among investors. He says: ‘Historically, the biggest strength of the UK and London was that it was seen as a very stable place that could be trusted. We have to go back to that.

There are measures the government can take, such as encouraging pension funds to invest more in the UK by changing the rules on capital. Reforms to boardroom governance could also make London look more attractive to businessmen.

But much of the solution, experts like Austin say, comes down to a change in culture and attitude.

As Amanda Blanc, head of insurance powerhouse Aviva, said last week, the UK financial sector must “stop talking bad about itself.”

Business leaders who believe in Britain have begun to fight back. Steve Hare, head of the FTSE 100 Sage software group, says: ‘We support Britain 100 per cent. We have incredible skills and talent here.’

Team GB also features Simon Peckham, head of engineering group Melrose, which is floating GKN’s automotive arm in London, having previously considered and ruled out the US.

‘We are a UK company; Why wouldn’t we float in the UK? he says. “I know there’s a downturn in the UK market right now, but it’s going to pull through. We’ve been here since 2003 and have had support for every business we’ve done.’

Mark Mullen, head of challenger lender Atom Bank, feels the same way, saying: ‘Atom is a UK company serving UK customers. It makes sense that we are looking to list in the UK.

“I think it would be unfortunate to see companies choose not to list in the UK when they have increased their success in this country.”

Letting foreign cash fill the gap is risky

The withdrawal of UK financial institutions from investing in UK trade and industry has been a disaster. In the late 1990s our pension funds and insurance companies owned more than half of the UK shares. Now it is about 5 percent. Instead, foreign investors have entered and now own more than half the market.

The reasons are complex and have to do with pension funding rules pushing money into gilts, the long-term impact of Gordon Brown’s foray into dividend payouts in 1997, etc.

But the result for British companies is simple. It’s harder to raise new capital here than it was a generation ago. When a company went public in the 1980s and 1990s, there was a queue of institutions lining up to back it. A portion of the shares had to be set aside so that small investors had the opportunity to buy some. Those days are long gone. The financial impact is that UK companies are rated lower than those listed in New York. That has two effects. It makes them more vulnerable to acquisitions and raises their cost of capital. In other words, it costs them more to raise the money they need to invest.

The first is obvious. The series of foreign offers by UK plc is a sign that foreign predators may see value here and have access to cheap funds to back that judgment.

The second is equally pernicious. If it costs more to raise capital, companies invest less and take less risk. They have to think short term. But it’s worse than that. Because they are more vulnerable to foreign takeovers, they try to keep existing shareholders by increasing dividends. That may be fine in the short term, but it also deprives them of resources to invest.

It is impossible to quantify the damage. There is no shortage of entrepreneurs, and the UK has managed to create many new businesses. We are number four, behind the US, China and India, in the number of ‘unicorns’ – companies listed with an initial valuation of more than $1 billion.

A more vibrant capital market would probably have created more, but this cannot be proven. Nor can it be proven that a company that raises money in New York instead of London will create jobs in the US instead of Britain, although it seems likely. What is clear is that large UK corporations need to invest more to improve productivity and create prosperity for the future.

Hamish McRae

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