According to UK investment bank Peel Hunt, the market for Britain’s small and medium-sized stocks is rapidly shrinking, putting London’s reputation as an international financial centre at risk.
The UK market is losing more companies than it is gaining. This is due to a lack of IPOs and a rush of takeovers from overseas firms. Peel Hunt reports that the FTSE Small Cap Index has lost 20% of its market value and 10% of its membership this year.
Charles Hall, Peel Hunt’s head of research wrote that “we are in a doomsday loop” where investors are withdrawing and valuations are low. There is also a lack of interest in IPOs. If this trend continues, the UK may lose an important part of its financial system.
Peel Hunt’s research focuses on Britain’s smaller companies. However, the bluechip FTSE 100 is also suffering. London’s status as Europe’s largest stock market was lost last November. This extended an equity slump dating back to Britain’s 2016 vote to leave the European Union. The recent rise in oil price allowed the UK’s commodities-heavy gauge to regain its crown. However, the market still struggles amid a struggling economy and the trend of companies fleeing for New York listings.
This includes firms like CRH Plc, an Irish building materials company, that have moved their primary listings from London to New York. The listing flops of several high-profile London IPOs in recent years, including Aston Martin Lagonda Global Holdings plc, Deliveroo plc haven’t been helpful.
Hall writes that a shrinking pool is a drag on investment and economic growth, and creates a spiral for investor flows. Peel Hunt’s research shows that 27 companies, with a capitalization greater than £100m ($122m), have received M&A proposals this year. These offers are mostly from foreign or financial buyers, which could lead to a company exiting the market. FTSE 250 companies Dechra Pharmaceuticals Plc, and Network International Holdings Plc are among them.
Hall said that regulatory changes to UK capital markets were welcome. However, he added that tax reforms are also needed to attract investment into smaller stocks.