UK Capital Market Confidence on the Rise
A combination of legislative and governmental moves, aligned with market uncertainties further afield have given rise to confidence in the UK’s offer for listed companies trending upwards.
At the end of July, the Bank of England announced cuts to interest rates, rounding off a series of announcements such as the FCA’s new Listing Regime and the King’s Speech to buoy market confidence.
What has changed in the UK?
The move dovetails with the King’s Speech which stated: “Stability will be the cornerstone of my Government’s economic policy and every decision will be consistent with its fiscal rules. It will legislate to ensure that all significant tax and spending changes are subject to an independent assessment by the Office for Budget Responsibility [Budget Responsibility Bill]. Bills will be brought forward to strengthen audit and corporate governance.”
Speaking at the G20 meeting in Brazil, Rachel Reeves, the Chancellor of the Exchequer, urged international business to “take another look at Britain…After years of uncertainty and instability, Britain is open for business once again,”
Not since before Brexit has the pound been valued higher against a basket of currencies than now. This has meant that the UK are paying less to borrow from global investors than other G7 countries, and investors are keen to place their money in UK government bonds in a sign of renewed faith in British assets.
The new government have put much prominence in the importance of growth, fiscal responsibility, and stability – the holy trinity for global investors and demonstrating a determination to put their manifesto pledges to work to capitalise on the UK being the fastest-growing economy in the G7.
Looking at the Bank of America’s flow data, its institutional investment customers have switched from net sellers to net buyers of UK equities over the last quarter, reversing a long-held trend.
It’s for these reasons that we could be seeing the early stages of a revival in the UK market prompting some firms to look to improvements in other mechanisms to further drive progress. Michael Summersgill, Chief Executive Office of AJ Bell, would like to see one ISA product to remove ‘too much choice’ that could overwhelm potential investors alongside a 20% raise in the overall ISA allowance as this would “naturally drive more money towards UK plc.”
Increasing uncertainties on the continent
The fortunes of the UK have coincided with a perceived downturn in major European capital markets that have seen Germany and France lose some of the lustre they held in previous years over the UK.
Germany is set to see the size of their labour force shrink over the next five years at a rate which is the steepest drop within the G7. This is combined by the share of gross public investment in GDP being the lowest among significant high-income countries.
France too have seen their fortunes waver with economic and political uncertainty. This perhaps leading to the start of a trend of companies like Vivendi, the French Media Conglomerate who own Canal+, now looking across the Channel to list on the UK exchange, stating “a London-based listing would represent an attractive solution for international investors likely to be interested in the group,”
Tim Sarson, UK Head of Tax Policy at KPMG, stated “Talking to Europeans in particular there is a sense that European politics might be moving in the wrong direction and that the UK might be becoming a bit of a liberal haven again.”
In comparison to two of its biggest rivals for listings, London looks particularly favourable and in June, it overtook Paris to take the European stock market crown as its stocks rose to $3.18 trillion compared to $3.13 trillion in France.
The U.S.
There are fears that the U.S. economy could be faltering – “With a package of data released today suggesting the economy is cooling at a faster — and perhaps too fast — pace, the drop in the ten-year Treasury yield to below 4% reflects a looming economic growth scare,” wrote Quincy Krosby, chief global strategist at LPL Financial, in a note.
Corporate Earnings season has started off slowly and there are calls that consumer strength have peaked and fears the US Federal Reserve have missed the optimal time to begin cutting interest rates. At the end of July, shares in UPS, a bellwether for the wider economy, dropped 12% on the back of missed analyst estimates and scaled back its projections for the rest of the year.
Amazon also underperformed with results that showed acceleration in its cloud computing business but higher capital spending and shrinking margins. As part of the U.S. ‘Magnificent Seven’, this can’t be ignored as a symptom of a marketplace that is underperforming according to its own lofty standards.
The U.S. Election will perhaps have the largest effect on investor confidence. Anatole Kaletsky, co-founder and chief economist of investment advisory firm Gavekal, believes investors will likely unwind many of their commitments given the fluid dynamics of the election.
The Republican candidate has also nailed his colours to the mast of the cryptocurrency community by vowing to “end the Biden administration’s crusade against bitcoin.” In doing so, Trump has promised to remove Gary Gensler, the Chair of the Securities and Exchange Commission (SEC), who led the charges against Sam Bankman-Fried, FTX founder, and Changpeng Zhao, founder of Binance that saw both men jailed. Gensler’s four years at the helm of the SEC have seen 64 new rules finalised, the most of any chair, that cover private funds, disclosure requirements around cyberattacks and how companies present executive compensation.
Cytec Commentary
“There are some encouraging signs that point towards a resurgence in investor confidence returning to the UK market. We’re also seeing this translate into more optimism across our client base with an increasingly positive outlook to the future.
I think this increased confidence could be well justified given the comparative instability and uncertainty across some of the other developed markets across the globe. We are buoyed by this upturn in confidence and look forward to seeing how this may translate to a revival of the UK capital markets.” – Shervin Binesh, Commercial Director, Cytec Solutions
