How to Fix the UK Stock Market Quickly and Cheaply
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Welcome to the Meron Talks Money Market Wrap, where we talk about the biggest moves in the market this week and what's driving them. I'm Meron Thumbs at work, editor-at-large for Bloomberg UK Wealth. And I'm John Stepik, senior reporter at Bloomberg and author of the Money Distilled newsletter. I'm not surprised to have to introduce myself.

Someone sent it to me about their thing. Every time I introduce myself and then we have to wait an extra beat for John to remember that he's coming on the podcast with me, even though it happens every week, often twice a week. Anyway, here we are. John's not surprised. I'm not surprised. But boy, are we ever bored. You listened. We're recording here on the 11th of June. And John has sat through the entire spending review this morning. I just dipped in and out.

Yeah, it wasn't thrilling. It did sound very fiscal event-y for something that's not meant to be a fiscal event, I have to say. And I did feel as if it was presented in the manner of a budget in that there was an awful lot of mentioning of our NHS and an awful lot of slagging off at 14 years of Tory misrule. But in amongst that, it was mostly rhyming off.

the sorts of stuff I say the sorts of stuff you get in the introduction to a budget when they talk about how they're going to fund I don't know rat traps and scunthorpe or something like that and there's a lot of that sort of stuff and not a great deal of meat on the bones and the market didn't have any reaction so at the end of the day I don't think we need to care except for the fact that taxes will probably have to go up in the budget I think

I think, by the way, I do care. I care quite a lot because it shows, however, you cut it quite a big rise in public spending. It shows that spending from 2024 through 2029 is going to be running and going on 45 percent of GDP. That's really massive.

Anything over 40% suggests that things are slightly out of control. It really does, given that it appears to be impossible historically anyway for the UK to raise more than 35%, 36%, 37% of GDP in tax revenue. So it suggests that we're going to see rising taxes, probably which we may refuse to pay, who knows. But we're going to see tax rates going up and we're going to see debt going up still.

And here we are in a really shocking situation debt-wise, incredibly fast-rising debt servicing costs, no economic growth. We're supposed to be investing in defence at really fairly high levels, and I don't think there was much about that in this that puts it up towards a 3, 3.5%. It was only 2.6%. Exactly. And that was pretty poor. Very poor. So,

You know, you look at this and all I can see is continual massive spending, taxes probably going up, more cracking of the social contract, difficulty in paying the servicing costs of this debt and not quite enough on defense.

Miserable times, John. Miserable times. I spoke to someone the other day, an American investor I was having lunch with, and we were talking about the miseries of the UK economy and miseries of the UK government. And he said, you know what, Mary? The problem here is that all this is completely fixable. It's simply a matter of policy. You can fix the UK. It can be fixed. It's just that for reasons I simply don't understand, your government doesn't appear to want to fix it.

Now, one of the things that we've talked about before, John, is about how hard it is for governments to fix stuff because they've given away so much of their power to quangos and other supposedly neutral bodies that in fact it's very difficult for them to do most of the things they want to do. And then we have lawfare, et cetera, et cetera. It makes it difficult. But nonetheless, a government with a big majority should have the power to at the very least return the power to themselves to do the things that they want to do, right? Yeah.

They should have. I think a big part of the problem is that a lot of the UK is now special interest groups who have specific interests in keeping things the way that they are, whether that be elements of the public sector or elements of the third sector or elements of the civil service that don't actually want all this power to be taken back off them. So I think there is a lot of pandering around

to people for whom the solutions to have a lot of our problems would be some of them not being in a cushy job anymore.

I don't think we should talk about the third sector anymore. I don't want to talk about the third sector. We talk about public, we talk about private, and then we have this third sector, which is somehow non-profits, charities, etc. But that's government. That is basically government because so many of them are mainly financed via state grants, gift aid, etc. But with even less accountability, that's the only thing. But I think the one thing, the only reason you have to differentiate in some way is it's like a kind of

it's like a parasite on the public sector already. Right, on to one thing that the government could change. Back to my American investor and him saying you can change all this stuff in the UK, you can get yourself back on a better path, it's simply a matter of political will. And when

I hear that, Serge. The first thing I look at is the UK stock market. That is something that we could fix. It really wouldn't be that hard. But for some reason, today's politicians and Rachel Reeves in particular are so obsessed with the happy news they've run from the private equity bros that they don't seem to be interested at all in fixing the UK stock market. This is turning into a rant. I'm just going to hand it over to you, John.

Well, no, but you're right. And it is yours. You wrote a very good piece on it for my distilled yesterday about the way that we've, this week alone, we just lost two decent looking, quite exciting tech type companies, Spectrus and AlphaWave. And they've both been bought over by US buyers. And as you were pointing out, like 30 companies

companies are either underbid or have been bid for this year and we've had one IPO. Well, that can't continue. That is a very rapid pace of de-equitisation.

That is our market literally dying, disappearing. And it means that there isn't UK growth for people to invest in, that new companies aren't there, that fast-growing companies aren't there, that companies that were extremely cheap in valuation terms are being bought out without UK investors getting the benefit or to get the premium. It's bought out at the average there. I can't remember what I said it was, something like 40%, 43%. 43%, yeah.

So you get that. But obviously, the people buying them think there's a lot more value in them than that 43% premium. Well, they wouldn't do it in the first place. And we miss out on all that. Yeah. And so how would you fix this, man?

I think it's quite easy. I mean, you know, we look at this and we've talked about this over and over and over and over. You look at the UK market, it's in the doldrums, it's all over. Everyone goes off and invests in the US, etc. We need first some signals. And the biggest signal of all, the biggest and best signal would be to get rid of stamp duty or at the very least cut it down to a very low level. One of the reasons that there is such low liquidity and low liquidity is one of the reasons why.

people don't like the UK market is because we have the second highest transaction tax on equity trading in the world after Ireland, which is not, you know, lots of places have no transaction tax at all. And those that do have a very, very low one because no one wants to pay this price, 50 basis points at half a percent every single time they trade. No one wants to do that.

So we have that. If you get rid of that, it'd be a great signal instantly. And it's not that expensive. So it's three point, Stamp Duty makes about three and a half billion pounds a year, which in the context of the X-Checker is buttons. So I think that that's really worth pointing out. This is something that probably would pay for itself, actually, in the longer run. I'm not sure how you would prove that to the OBR, but at the same time, it really isn't a lot of money.

Yeah, there have been some studies on this, actually, but not in the UK, in the US. But it turns out in Texas, et cetera. In fact, there was one in the UK, but it was quite some time ago, so maybe not valid anymore. Anyway, the benefits of a healthy diet.

deep, liquid equity market go far, far beyond a couple of billion quid here or there in tax. So there's that. Then there's all sorts of things that you can do to make it a little bit more easy to list, a little bit more straightforward, a little less expensive. You could do some various regulatory things. And the most important thing here is flows. Is

is seeing money actually coming into the market to improve the liquidity. And you and I have talked before about the Brit ISA. We were great fans of that, although apparently we shouldn't have been. And that doesn't go with our brand and go with our vibe. But actually, we are pro the British ISA.

If you get tax relief from other UK taxpayers on money you invest, it makes sense that you should be obliged to put that into the UK market. You don't have to have an ISA. You don't have to have a British ISA. You can invest without a tax wrap. Absolutely fine. But it makes sense to think that money that gets UK tax relief should flow into the UK. So there is that.

And then there is, you know, we're against, I suppose, generally speaking, mandating pensions, et cetera, to invest in UK markets. But again, we're talking here about getting tax relief from the UK taxpayer. So does it make sense to at the very least have a strong expectation that UK pension funds would invest in the UK market like they do in other countries, by the way? Australia. We're a bit of Australia. And I mentioned Australia.

I think in the piece I wrote for you on money distilled that countries such as Chile, Mexico, etc. are reforming their pension systems to push up equity inflows, not necessarily mandating them into their own markets, but nonetheless pushing up flows. So,

It seems to me that there are a variety of things that you can do to make the UK look more attractive to both domestic and to international investors. They're not expensive. And in the main, they come down to signals as much as anything else. Because right now, every single signal that the UK is sending to the rest of the world is, nah, it's a bit of a rubbish market. And you know what? We don't care.

And you can turn that around pretty quickly. Well, yeah, and the other thing is, they are basically mandating that the pension funds have to put 10% of their money into private assets, 5% of which has to be in the UK. Now, OK, some of that can be an aim, but I think, A, I don't like the idea that

At this stage in the private equity cycle, retail investors both here and in the US are being tapped up by private equity lobbyists to act as exit liquidity for their duff investments. However...

Even if you sort of sympathise with private equity in some ways, if you can revitalise the UK market by pushing flows into the UK market or rather attracting flows to the UK market, then that's a place where the private equity people can go and IPO their stuff. So it still makes far more sense to boost equity

a kind of solid piece of financial infrastructure that we already have that is currently kind of weathering on the vine. We already have it. It's already there. It's incredibly important to our economy and the infrastructure around it is a big part of our services economy. It's already there. It needs a little help. Why ignore it in favour of something maybe a little more fashionable? Yeah. Especially this pandemic

Pisces thing that new market kind of seems a bit of a because that's actually going to be free of stamp duty but you know it's going to be what trade probably once a month or kind of once a fortnight it just seems odd to be setting up these other things that will probably struggle to get traction and

And not just focus, as you say, on the things that already exist. Yeah, already exist are important. And crucially, and this brings us back to the beginning, are fixable. Yes. It's an easy win. A really easy win. So why not just do it? A little bit exhausting, isn't it?

Slightly frustrating, yes. Very frustrating. Anything else we should talk about? I suppose we should mention that the S&P is now back where it was on Inauguration Day. So basically the entire debacle since Trump bought in, the stock market debacle, it's over. All gone. Nothing to worry about anymore. Yeah, that was... I suppose the only thing is that at least it's still down in dollar terms, but that's about it.

And I suppose the other thing to say is that if you've been in the UK market this year so far, you'd be up, what, 8, 8.5%? I haven't checked the figures recently, but yeah. But actually, we're just almost at a new high for the FTSE 100. I'm just going to double check on my handy Bloomberg app. Yeah.

S&P up 2.6%, NASDAQ 2.17%, UK 8.4%, France 5.6%, DAX 20.4%. So, you know, leadership has definitely swapped. I'm going to write about that in my newsletter this week, everyone. So watch out for that. John, anything to add? Nah, we're closing the gap. Only another 20 years of outperformance and we'll have made up for it.

You might need a little help from Rachel Rees for that. Abolish damn duty. Just abolish damn duty. Thanks for listening to this week's Merrin Talks Money debrief. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter at MerrinSW and John underscore Stepak. Our show is produced by Sam Asadi and Tala Ahmadi. Sound design by Blake Maples. Questions and comments on the show and all our shows always welcome. Our show email is MerrinMoney at Bloomberg.com.

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