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Last week, US confectionary giant Mars made a takeover bid for Hotel Chocolat which valued the AIM-traded company at £524m (or 375p a share) - a whopping 170% premium to the previous day’s closing price.
Now that looks pretty exciting for the company’s investors until you take a look at the share price chart.
Hotel Chocolat listed at 200p per share in May 2016. In July 2021, management raised £40m from shareholders in a placing at 355p per share. The bid from Mars offers the investors who bought into that placing just a 6% premium.
And Hotel Chocolat is not the only UK-listed company whose share price weakness has caught the attention of opportunistic dealmakers. Halfords has recently walked away from merger talks with Redde-Northgate stating the offer on the table undervalued the business. Halfords is currently worth £500m, which is about half the value it reached during 2021 when the UK was in the midst of its post-pandemic cycling boom. The merger offer from Redde-Northgate would have built a combined business worth £1.4bn and offered shareholders no premium.
Looking at market performance charts from the last few years, it’s hardly surprising that the UK is ripe for consolidation. While international indices including the S&P 500 and Stoxx Europe 600 have climbed, the FTSE All Share is almost flat over the last decade. And the picture is even more bleak for Aim, which was the worst performing index in the world in 2022 and (after a 15% decline in the year to date) looks on track to match that miserable statistic this year.
The UK market equity discount to the rest of the world is reportedly at its widest level ever and the FTSE All Share is trading on a price to earnings ratio of 12.9 times, compared to a historic average of close to 20 times.
And all this negativity is starting to fuel a vicious cycle. Companies go public to access capital and expand, but depressed valuations means the appetite for listing in the UK is very low, so great British businesses are looking to international and private markets to raise funds. Thus, companies are leaving the UK public markets faster than they are being replaced, fuelling further negative sentiment.
The situation has not gone unnoticed.
In 2021, an independent review conducted by Lord Jonathan Hill recommended a major overhaul of the UK’s listing rules in order to strengthen the public markets. The former MP pointed to the sharp drop in the proportion of companies seeking an IPO in London (between 2015 and 2020, London accounted for only 5% of IPOs globally, down from a peak of 40% in 2008) and suggested that disproportionate number of ‘old economy’ companies on the FTSE was off putting to investors.
More recently, another independent review led by Rachel Kent has recommended an improvement in the research available into public companies. She suggested that a lack of availability of independent research has contributed to a low demand for investment in the UK. Independent research, especially for UK small caps is certainly thin on the ground. MiFid II regulations which arrived in 2018 have a lot to answer for.
Pension reforms are also a hot topic, especially given the fact that the volume of pension fund outflows to ‘safe haven’ bonds has been a major contributing factor to the underperformance of the UK stock market in the last year. Earlier this week James Ashton, chief executive of the Quoted Companies Alliance, told the BBC’s Wake up to money podcast that pension funds were “out of control” and called for better incentives for managers to invest their clients’ money in the domestic markets.
And talking of incentives, there are also calls for a change in the structure of the ISA to make it more attractive for private investors to put their money in home-grown companies. Proposals include a simplification of the ISA structure to allow the free movement of funds between cash and investments within one ISA, thus removing the requirement to open separate ISA accounts. Another change being reported ahead of this afternoon’s Autumn Statement is to allow Brits to open multiple ISAs of the same type with different providers in the same tax year.
A more radical suggestion is the launch of a Great British ISA - a potential additional tax-free allowance for investment in companies listed in the UK. Mr Ashton at the QCA has gone one step further in his calls to incentivise UK investment. He doesn’t think the capital gains and income tax shelter of the ISA should apply to international companies, but should be reserved only for British investments.
There’s a hint of ‘Tell Sid’ about the government’s interest in capital markets reform. In fact, over the summer, The Centre for Policy Studies (a think tank with significant influence in Conservative circles) suggested that it was high time for another advertising campaign to encourage savers to take their money out of the bank and put it into the stock market.
The ‘Tell Sid’ campaign of the 1980s, alongside the privatisation of many big British businesses, sparked a change in the way the British population thought about investing. According to Kenneth Baker, minister for industry and information technology at the time, “when we came into office, there were about 3 million people who owned shares in Britain. By the end of the Thatcher years, there were 12 to 15 million shareholders”.
But ‘telling Sid’ and implementing reforms and overhauls of listing rules and tax breaks doesn’t get to the heart of the problem with UK’s public markets. And that lies in education and excitement.
Most Brits go through school and university without once being taught about the opportunities boasted by public markets. Many set up ISAs (around 12 million ISA accounts were subscribed to in 2022), but the majority of those are cash ISAs. The stock market is perceived by much of the population as a playground of gamblers and the ultra-wealthy. Broker and wealth managers with hefty and complex fees don’t make things any easier.
And then there are the companies themselves, where dividends and buybacks are more revered than investment in growth. The hunt for innovative companies in the UK’s public markets is a tough one. Most of the FTSE’s best companies are celebrated for being steady and reliable, rather than innovative and exciting.
But it isn’t as though the country lacks innovation. We have some of the world’s best universities, with some of the world’s most exciting technology, and yet those companies struggle to gain traction on the public markets. Overhauls and policy reforms to make it easier for innovative companies to list are welcome, but what the FTSE really needs is for more Brits to change their attitude to investing and risk. And that starts with an improvement in financial education.
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I see your logic Roger, but will that not have the opposite effect? The 'Law of unintended consequences' in full effect.
If Cash ISA's are removed will people not see that their only option is to invest in shares and think "that's too complicated/is gambling/I don't understand it and or I can't be bothered to try and understand it" and just end up leaving their cash sitting in bank accounts? The average Joe Public is going to take the option that requires least effort.
I have spoken to plenty of friends who are well educated but who do not invest and most don't even understand the basics, nor do they have any inclination to learn. It's something that is too easy for them to leave on their "to do" list and never quite get round to.
Starting basic financial education at school would be a logical idea. I left school twenty five years ago and we had zero financial education, it may have changed, but I doubt many of today's school leavers would know much about an ISA or even a mortgage. That's where we need to start.
Edited for spelling mistakes
Hi Jeremy,
I could not agree more with you concerning the lack of financial education in schools. This in my opinion is where reform needs to start. We leave school and never use a large part of our education ever again, but we are not taught about investing. It is not for wealthy gamblers, this believe needs to stop. I have heard that there is over £250bn sitting in peoples bank accounts in cash, being eroded by inflation, which is ridiculous. How do we encourage people to invest this money into London listed stocks. Another "Sid" campaign would be a good start.
As a nation we are obsessed with dividends. Some institutions will not invest in companies that do not pay a dividend. Yet many globally recognised US companies pay no to very little dividend. Berkshire Hathaway has never paid a dividend, with their biggest holding, Apple, yielding 0.5%. Instead Apple has used the money to finance growth.
The same obsession can be applied to investing in property even though shares have historically out performed this asset.
After that rant I had better go and lie down in a dark room
Actually the investment side is also FSCS protected - but not against making bad investments! Is protected against the provider going bust - relevant if you are in a money market account or nominee account !
Per institution so this would be a combination of savings / investment products. And institution eg Lloyds Bank would include all its divisions including Halifax/Halifax share dealing !
Not sure that scrapping one tax benefit means that investors will pony up and support a contracting stockmarket. Must be more carrot and less stick I would have thought.
Fractional share investing on the bigger platforms might help. HL would probably do a very good job of marketing this to a wider audience.
I have one eye on the possibility that we are cheap market that might get smaller and cheaper over the next 5 years if something isnt done soon.
I think a lot of the blame lies with the FCA who have made quality financial advice unaffordable for many. That’s why so many people have ended up depending upon advice from their bank which has then created countless reviews.
Financial Advisors simply cannot afford to take the risk of handling small portfolios without taking substantial fees to cover their transactional costs and the costs of their professional indemnity insurance.
My son was brought up as an investor which he did all the way through 6th form, college and university. However, with a demanding job, side hustle, partner and 17 month old son, he no longer has the time.
A financial advisors fees would represent a disproportionate proportion of any annual gain on his portfolio so he’s now 100% cash and likely to remain that way for the foreseeable future.
It could definitely help attract new investors if the stocks and shares bit was insured against bad investments too.I'd vote for that.Perhaps it's a little like changing banks.... very few people do even if the service is bad and the interest rate is inferior.However perhaps we need to get Martin Lewis on this if he isn't already as sites for changing utilities companies etc... seem to do well.
I was reading a piece in the FT the other day about the London Stock Exchange (LON:LSEG) and i knew they owned Refinitiv the data business.However, i didn't realise that their revenues from the actual London Stock Exchange only make up crica four percent only, i think the article said, of overall revenues.And they had to divest their stake in the Milan Stock Exchange prior to doing the Refinitiv deal.The article was somewhat querying how invested the company as a whole is in a part of the business which consists of the overall group's revenue.Perhaps they're not so interested and invested in the actual day to day running of an exchange anymore and prefer competing with Bloomberg et al... where the 'real money' is?The government does seem to be wading in slowly though now..?
There have been some more growth companies listed on these shores admittedly in the last couple of years which spring to mind,However, these are difficult for me personally as an individual investor to try to value as some aren't profitable yet and are still growing revenues.I'm sure there is a formula but some of the sectors are tough to understand for a non expert in addition to different valuation metrics.So it would have to be a bit more of a punt than usual from me.
Admittedly i have punted on a couple in the US markets that have been battered in the rates storm in sectors which seem to have favourable future CAGRs, such as in the BNPL space, which i like.But liquidity is higher over there and a valuation of five billion is still a minnow fintech in the US.
Not sure we should quibble about investor tax breaks. Unwillingness of most people to invest in equities is about the apparent poor share price performance of so many companies. Look at the recent performance of the FTSE 100 or, even more, the 250 or AIM. That is enough to deter any potential new investor. Why even bother when 5% is available on cash with no risk?
The solution begins with better management. That requires greater transparency and a range of measures to improve culture. A huge subject we discuss indirectly on this forum from time to time; but minor tweaks to investor tax breaks is a very small part.
Perhaps the Govt itself should invest in UK listed businesses in a similar way to Norway (Statens Pensjonsfond).
This would add support to the UK stockmarket, and in addition it would help to reduce the Ponzi scheme that the UK state pension currently is.
The funds could be split between income and growth stock, with a proportion being invested in smaller stocks too.
In addition, a longer term view to the rules for SIPPs and ISAs is needed so that individuals can invest for the long term without the fear that a future Govt will view the fund as their piggy bank to be raided when times get tough.
In my view the root of the problem is that the FCA seems to be in a doom loop of its own making. The knee jerk reaction to increase regulation appears to try and compensate for a lack of ability to enforce the powers it already has.
Anyone who read the Gloster report into the FCA's handling of London and Capital Finance Ltd will have probably been startled by the the lack of basic knowledge within various divisions of the FCA.
The executive summary (page 43 onwards) gives a withering overview of FCA's failings.
If the private investor does not believe they have a safe and /or cost effective way of investing in the UK market then they will, as stated by Scrooge, sit on cash at circa 5% interest.
My view is that interest in the UK market will resurface only when the current echo bubble in the "Magnificent 7" bursts. There is no interest in the UK when returns oin the S&P500 have been so great.
One positive was the continuance of the Venture Capital Trust tax break until 2035 - this is an industry that supports start-ups and AIM listings. It was, however, very disappointing that they have not introduced a British ISA. In my view, you should only be allowed to invest in UK listed shares to get a tax break. Why should you be able to get a UK tax break on investing in Apple or Tesla?
Investment trusts urgently need protection from the unfair cost disclosure regulations which is resulting in wealth managers being forced to sell them and discounts widening to c18%. We have the best closed end investment trust sector in the world, far exceeding the US or any other country in the world - a little known fact and one of the few sectors that we are still a genuine superpower! The government doesn't even shout about an industry where we are beating the US and does nothing to help it. The FCA have apparently been given the action of an interim solution for the cost disclosure problem which results in double counting of costs versus an open-ended fund. Lets hope they sort it out quickly!
Thinking back to the "Tell Sid" campaign which was part of a Conservative initiative to privatise state run industry like BT or BGas and at the same time by discounting share sales encourage wider share ownership. The thousands of Sids who bought in were either already aware of the stock market or just caught up in the hype from newspapers and TV adverts. My memory of what happened after were that a lot took an instant profit to fund a holiday or new car and some were tempted to become serial investors. The foundations of the dot-com bubble were laid. Helped by a new generation of big-bang hungry incentivised city sales people using new technology in firms that didn't have traditions of "my word is my bond" or regulation keeping pace with the explosion.
It was like the gold-rush as boiler room telesales pestered people getting details from shareholder records. A lot of lambs slaughtered never to return to stocks and shares.
I have become aware of a new level of powers being used by the FCA, to perform spot checks on financial institutions to monitor controls on money laundering and how firms act in clients interests rather than just their own. They have teeth and I hope that the standard of customer care for inexperienced clients results in mutual benefits. The internet has opened up opportunities for Sids that didn't exist 25 years ago in researching companies and directors, but also for scammers who promise to make you rich.
This letter to CEO's from the FCA makes interesting reading:
Megan I agree, I think education is the key thing missing in this country with regards any sort of financial education . As an example currently in schools The London Institute of Banking & Finance provides a course called Financials Studies where pupils (from GSCE to A’Level) learn about mortgages, different types of savings, bank accounts, investments and what the FCA etc do.
This course will stop from next academic year because government funding has been withdrawn and so LIBF has withdrawn the courses.
Also the main news channels never mention about what the FTSE, American or European markets are doing on a daily basis only when we have a large drop. Contrast that with Italy as an example the main news channel everyday tells you where the main indices are, where US futures are, currencies and bond spreads.
In the USA they are taught about investing and markets from a young age. As an example on a trip to an investment conference in the mid 90s, I was asked by my young cousin she was about 13 at the time if I could help with her homework which was to write a report on Cisco Systems. So they are building that interest in capital markets from a young age which is in marked contrast to here.
I agree with the comments already made about an obsession with dividends in the UK and that unfortunately I think is imbedded within the psychi of UK fund managers too ( those managing UK investments). Would they have ever invested in Amazon.com (NSQ:AMZN) if it was a UK firm when it first came to market…
Also lastly the UK is a country totally obsessed with housing and not much else when it comes to investing.
Hi Lords
A portfolio of ETFs only would not take that much time to manage. Could even buy just one global ETF tracker type vehicle.
Also, While I think a lot of what the FCA does is counter productive, the IFA industry has not covered itself in glory!
" Why should you be able to get a UK tax break on investing in Apple or Tesla?" This is a very good question best answered by (rich) Tory politicians like Rees Mogg, Osborne or Hunt. They are ones with enough financial expertise to be able to do so.
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One thing the Government could do to improve the investment culture is to scrap Cash ISAs.