A shrinking financial powerhouse
Once a bastion of global finance, the UK stock market is facing significant challenges, facing liquidity issues, declining investor confidence and competition from more dynamic financial hubs. While the U.S. market continues to experience strong growth, the Square Mile story presents a more sobering story.
This article examines the current state of the UK stock market in the context of domestic and international developments and provides insight into its struggles and potential opportunities.
Shrinking UK market
London attracted just 17 flotation companies in 2024, raising £777m, but lost 88 in the same period.
Major companies such as ARM and Revolut have chosen to list on the more liquid and well-capitalized US market, leaving the UK behind in the global race for financial supremacy.
Furthermore, the UK market is shrinking at the fastest pace in a decade, with the number of listed companies falling from 3,250 in 2007 to fewer than 1,800 today.
Initial public offering (IPO) funding in London fell by 9% in 2024 to just $1 billion, ranking the UK 20th in the world for IPO activity.
A market that is just a fraction of Britain’s size, just 1%, has outperformed London in attracting new listings.
US market growth and Republican policy: a global contrast
The US stock market recorded double-digit growth for two consecutive years in 2023 and 2024, supported by a bullish mood supported by Republican control of the Senate (majority 4) and House of Representatives (majority 5).
Republicans are rushing to pass their legislative agenda ahead of the 2026 midterm elections, and history suggests they could lose one or both of their majorities. The strong US stock market stands in sharp contrast to the stagnation in the UK market, which has struggled to attract capital and business over the past decade.
Key challenges facing the UK stock market
The UK market’s struggles can be attributed to several factors.
Lack of liquidity: UK pension funds, which allocated 48% of their capital to UK equities in 2000, now have just 6% of their £600bn of defined contribution plans invested in domestic equities. . This compares to 44% in the US. This change significantly reduced liquidity in the UK market. Disincentives for listing: A 0.5% stamp duty on share transactions would generate between £3.2bn and £4.4bn a year in revenue for the UK Treasury, but would be a drag on companies looking to list in London. It acts as a deterrent. Low retail participation: According to ABRDN, UK equity trading faces headwinds from the 0.5% stamp duty levied on trading, leading to lower retail participation. Savers invest just 8% of their assets in stocks and mutual funds, compared to 33% in the United States. There is around £300bn sitting in cash Individual Savings Accounts (ISAs), further exacerbating the liquidity crunch. Many argue that his money could be put to better use by investing in British stocks, which could help boost the country’s economic growth. Capital outflows from UK equity funds: According to the Sunday Times, UK equity investors have withdrawn £25bn from domestic equity funds since May 2021, further undermining market confidence. Activist campaigns: According to Alvarez & Marsal (A&M), activist funds launched 59 campaigns against UK-listed companies in 2024, the most in Europe and the fourth in the world. There are many Compare this with 38 companies in Germany, 19 in Switzerland, and 12 in France. These campaigns highlight undervalued British businesses, while also pointing to the vulnerability of the UK business sector.
Impact on the UK economy
The finance and insurance sector is a major contributor to the UK’s gross domestic product (GDP), accounting for 9% directly and rising to 12% when related professional services are included.
The Square Mile generates an annual economic output of £97 billion and employs 678,000 workers.
The contraction of the UK market not only threatens the country’s status as a global financial center, but also tax revenues.
Signs of possible recovery
Despite the challenges, there are some positive developments, including the potential £2bn flotation of Shawbrook Group.
Additionally, the UK government and financial regulators have acknowledged the challenges and signaled potential reforms to attract more listings and investment. These reforms, if implemented, could attract more stock trading activity.
Tax reform, improved listing incentives and efforts to channel domestic savings into equities could help restore confidence.
How to invest in UK stocks
Thoroughly research the UK market Consider both opportunities and risks Open a stock trading account Choose an investment approach Monitor market trends and adjust your strategy accordingly
While challenges exist, remember that the UK market continues to offer opportunities for prudent investors who carry out thorough research and maintain a long-term perspective.
