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As floats flop and foreign buyers pluck good companies away with steady M&A action, being a prominent broker for London’s small- and mid-caps is like being the Titanic’s customer retention manager.
Despite all of this, Peel Hunt is still trying to come up with ideas about how to fix London. Charles Hall, its head of research, writes in a note today:
The pace of decline is relentless and is likely to continue unless effective action is taken quickly. We are currently in a doom loop, where valuations are low, liquidity is reducing, investors are seeing withdrawals and there is little desire to IPO. If this continues, the UK could lose a crucial part of its financial ecosystem. Regulatory reform should help, but it is the demand side that requires serious attention.
Hall sees hope in the individuals, saying the situation can be turned around “relatively easily” through reforms aimed at coaxing back individual investors.
But what kind of reforms? Well, loads of tax cuts, duh:
— ISAs – Introduce an ISA allowance dedicated to investing directly in companies or funds dedicated to UK small and midcap companies. It is perverse that investors receive a tax break, which is then invested overseas.
— ISAs – Combine cash and shares ISAs, so that investors have greater ability to adapt their investments according to their requirements, rather than being locked into a single investment strategy.
— CGT – Remove CGT for investing in listed small and midcap companies (similar to gilts).
— Corporation tax – Introduce graded tax for companies based on certain profit levels, to reduce the negative impact on smaller companies from the recent increase from 19% to 25%. This could be focused on listed companies, to reflect the importance of the equity market to wider society.
— SIPPs – Mandate a proportion to be invested in UK-listed assets in return for the associated tax benefits.
— IHT – Broaden the inheritance tax exemption from AIM to fully listed smaller companies, with a similar two-year holding period.
— Pensions – Extend the Mansion House compact to include small and midcap companies as well as AIM, and accelerate the timetable.
— Stamp duty – Remove stamp duty for transactions in listed small and midcap companies (similar to AIM), to reduce friction and improve liquidity. We estimate the total tax take on this to be only £10m, so there would be considerable benefit for a very low cost.
— Local Government Pension Schemes (LGPS) – Broaden the initiative to increase exposure to growth assets by widening the mandate to go to 10% in private equity, to include small and midcap listed companies. Also, the requirement should be for these funds to be explicitly targeted at UK investments.
— Superpensions – Scale matters in pensions, as it gives purchasing power, cost advantages and greater ability to manage risk across a broad portfolio. The benefits can be material to the domestic economy. A good example is the growth of AustralianSuper, the largest pension fund in the region, which outperforms UK pensions and has a higher weighting in listed companies.
OK, we accept that about three of these things aren’t tax cuts. But when the public finances look so tight, is there something to be done other than tax giveaways to stimulate demand? Let’s look at the supply side:
— Media: LSEG is creating a negative atmosphere around moribund IPO market