Why public markets are a public good
Far from being irrelevant, UK public equity markets are a vital public good essential for tax revenue, corporate transparency, and economic growth, which requires urgent tax reforms to encourage companies to list and remain in the UK, says Charles Hall
There is a school of thought that thinks public equity markets are relatively unimportant and that access to private markets is all important. And when companies are listed, many consider the location of listing as largely irrelevant. For many reasons this is far from the mark and needs to be challenged. In reality public markets are a public good and a vital part of our financial ecosystem and economy. Far from ignoring public markets, we should be actively addressing any challenges and ensuring that our markets are healthy and fit for purpose.
So what are the challenges? The key ones are the globalisation of capital, the growth of passives and the scale and allure of the US. All of these are long-term trends that are not likely to change any time soon. So, if we want to have a thriving UK equity market we need to encourage UK capital to stay at home, to attract overseas investment and to ensure that the best companies want to list and stay in the UK.
Just consider whether Thames Water would have been able to operate in the way it did for the length of time it did if they had been subject to greater scrutiny. Visibility and transparency are fundamentally important attributes of public markets
Back to the importance of public markets. There are so many reasons why public markets are a public good ranging from tax and scrutiny to the ability to build savings which is available to all. Let’s start with tax – public companies pay more tax than private companies. This should be obvious, but it needs saying loudly and clearly. Most public companies are very transparent with their tax affairs, whereas many private companies structure their business or their balance sheet to minimise corporation tax. Listed UK companies generate c£100bn per annum in tax and are vital contributors to paying for our public services. On top of that, they drive close to £20bn of tax on dividends and enable over £4bn to be collected in stamp duty. If any of our major companies chose to move overseas, a hefty amount of tax revenue is permanently lost to the UK and that’s before you consider the loss of key roles and future investment as well as the secondary impact on the revenues of a broad range of financial services companies.
Now think about scrutiny and visibility. It would be wrong to claim that listed companies are all paragons of virtue, but they operate in the glare of publicity and scrutiny of pesky analysts and journalists. There are many great private companies, but plenty are able to hide in the shadows. Just consider whether Thames Water would have been able to operate in the way it did for the length of time it did if they had been subject to greater scrutiny. Visibility and transparency are fundamentally important attributes of public markets.
Tax revenue and growth
Not only do public companies pay a lot of tax, they are also important for economic growth. Many of them have considerable overseas operations and these generate funds to support and grow domestic operations and pay dividends. They are also supported by a wide number of suppliers and professional services businesses which are fundamental to prosperity in the UK. Furthermore, UK investors have £1tn of savings invested in the UK equity market, which is owned by pension funds, charities and ordinary investors. Growing this pot makes a material difference to long-term spending power in the UK.
A clear attraction of public equity is that it is open to everyone and you can buy or sell on a daily basis. This provides low-cost access to invest in companies that over-time should provide both capital growth and dividends. There is growing recognition that we need to do more to encourage retail investment, given the long-term performance of equities compared to cash or fixed income. This is particularly important given the shift to defined contribution pensions and the woeful lack of long-term savings. Core to this is financial education and information as well as access to relevant advice. It is encouraging to see that these are now being actively addressed.
Naysayers suggest that the UK indices are heavily weighted to traditional businesses and it’s true that we are overweight in terms of banks and energy compared to the US. However, we have numerous global leaders listed in the UK as well as technology led companies such as LSEG, RELX and Sage. It would not take many new entrants to fundamentally change the mood. Just think, if ARM had listed in the UK it would be the fourth largest company by market cap and visibly demonstrate the strength of UK tech.
The UK has an exciting number of fast-growing private companies. However, we need to ensure that when they decide to list they see London as the obvious choice. For the reasons above, this is important for all of our futures, not just investors. There has been a fundamental mood shift in the UK and the recent regulatory reset is hugely compelling as it makes London a natural home for public companies. But we will not have a thriving UK equity market if we don’t have UK capital investing in our companies. We also need to have a tax environment that makes listing in the UK an obvious choice for our entrepreneurs. This is why pension, ISA and tax reform is essential for our long-term growth and prosperity. Get this right and the government has a real chance of delivering on its growth agenda.
Charles Hall is head of research at investment bank Peel Hunt