Can retail investors save London’s beleaguered stock market?
Amateur investors represent an largely untapped pool of capital in the UK – but convincing them to pump cash into the London Stock Exchange may be an uphill battle, writes Charlie Conchie.
Projected onto the screen behind the City minister at Schroders’ London Wall HQ last week was a figure: £740bn.
That number, argued capital markets think tank New Financial to a room full of City figures, was the amount of cash that could potentially flow into the UK stock market if UK investors were a bit more like the Swedes. All it would take is households investing a quarter of their assets in equities.
The problem, however, is that Brits have for a long time been heading in the wrong direction. Just 11 per cent of UK households now invest directly in shares, half the number it was in 2004. Swedish households invest at double the rate compared to the UK. In the US meanwhile, the motherland of retail investment, 40 per cent of households’ financial assets are invested in the stock market.
The argument is therefore a two-pronged one for groups like New Financial. Yes, the prize is a multi-billion dollar capital for listed companies. But the people actually holding the cash have to be convinced it’s in their interest as well. And a quick look at the returns of the FTSE 100 and FTSE 250 over the past ten years shows the argument is not a straightforward one to make.
Those backing the move to unlock retail money say the debate has to go far beyond pools of capital and more firmly hammer home the benefits to the everyman.
“We think about retail inclusion in terms of obligation and opportunity, two sides of the same coin,” says Mike Coombes, head of corporate affairs at retail investment fintech Primarybid, which sponsored the new report.
“There’s an obligation to ensure that individual investors are not being excluded from key areas of our public markets – something which should not just be policed by the Financial Conduct Authority but is fundamentally the responsibility of the whole ecosystem,” he said. “The other side of the coin is opportunity for investors.”
Their argument is that the over £300bn sitting in cash ISAs alone could be better put to use in equities and deliver better returns. However, the task to actually convince Brits of that logic is a hard nut to crack.
There is an apocryphal tale told by City types after their travels in New York: the taxi driver to the airport casually discussing their investment portfolio. Whether the story has ever actually happened is not entirely clear, but it’s used to underline the chasm between US and British and European attitudes to investing.
As New Financial noted in its report, the US’s investment culture is one underscored by a “openness towards risk”. More than 60 per cent of US households are willing to take financial risks, compared to 30 per cent in the Euro area, according to an European Central Bank paper.
While efforts are underway to remove some of the regulatory barriers to retail participation, with measures to streamline and simplify investment prospectuses and strip away restrictions on retail investment in secondary fundraising, changing the culture is a far more long term project.
Recommendations floated last week included public information campaigns akin to the Thatcherite ‘Tell Sid’ push of the 80s, comprehensive financial literacy education in schools and smarter use of technology to ‘nudge’ investors into the stock market when cash holdings top a certain level.
But Mark Austin, a partner at law firm Latham Watkins who has been at the centre of a number of government-commissioned reviews into the secondary capital markets, says the UK faces unique cultural challenges in its push for more equity investment.
“The UK has its own individual psyche and our equity culture needs to be tailored to it and we need to find our own approach to it.”
Mark Austin, a partner at law firm Latham Watkins
“The UK has its own individual psyche and our equity culture needs to be tailored to it and we need to find our own approach to it,” he told City A.M.
“But you can see that starting to change already with the discussions around risk on versus risk off as a cultural point, disclosure based listing regimes rather than overly black letter ones, celebrating success rather than denigrating it.”
Prime Minister Rishi Sunak addressed some of the cultural barriers head on at his AI safety Summit last week, Austin says, recognizing that “risk is an acceptable and normal part of life and, if we’re serious about growth, is something to be embraced” rather than “automatically run away from”.
Ministers have powers to boost the pitch to retail investors by reviewing what are currently lofty taxes levied on equity investment. Investors currently pay stamp-duty when they invest in UK-listed stocks but not on US ones, for example, and New Financial argues the current ISA regime is a complex and confusing one for investors.
But bosses are already accepting that much of the heavy lifting in shifting the culture will need to be borne by companies themselves.
“I think the culture question is much harder to solve. It’s much more philosophical ultimately,” Anne Fairweather, head of government affairs at the UK’s biggest investment platform Hargreaves Lansdown told City A.M.
”The thing we can solve is creating an experience that it’s actually more useful to people, And [one] that doesn’t go from zero to 100 miles an hour with nothing in between,” she said. “I think that’s, that’s the bit that’s missing.”
Companies, she says, now have a “duty to explain how risk is useful in the long term”.
After sluggish growth in the valuation of Britain’s listed companies, a drop-off in listings over the past 12 months, and a doom and gloom gripping the City, firms might be forgiven for licking their lips at that £740bn pool of capital.
But the battle to win Brits round to their side of the argument may be a more uphill battle than they would like.