Justin Skyline

Reforming the Stock Exchange

22 Apr 2016

Justin Urquhart Stewart, Head of Corporate Development

We look at the role of stockmarkets in raising capital for businesses, the limited number of other sources and how the pending merger of London's stock exchange with the Deutsche Boerse may impact that function for the economy.

Reforming the Stock Exchange

 

What is the primary purpose of a stock exchange? Well, if you were to believe what most of the financial pages of the media seem to say, it is to keep pompous gits in red braces in the style to which they have become accustomed! Or to put it another way, to maintain the status quo of the financial services industry. This means the provision of sufficient business, income and profit to those houses involved in the trading and operation of the markets. In my view this is wrong and could not be further from the truth.

 

The primary purpose of any stock market is to raise funds/capital/monies for businesses in the most cost effective, efficient and compliant manner possible.
Anything else may still be important, but they are secondary outcomes and frankly cannot exist if the primary function is not operating successfully.

 

The problem though in the UK is that the London Stock Exchange (LSE) seems to have forgotten, or at least diminished, this primary function very significantly. If this continues then you would have to call into question either the operation or the very reason for having this market in the first place.

 

Now obviously there is going to be a significant change at the LSE with its £20 billion takeover by (sorry merger with) the Deutsche Boerse, but the same argument will still prevail with the larger entity. The LSE has previously flattered itself on what it has achieved for smaller businesses, although I cannot think for the life of me of anything that they have done in practice. The AIM market, which was originally conceived in Glasgow to break the mould of smaller company Initial Public Offerings (IPOs), has since those early days been changed and now suffers from layers of additional regulation so that it is certainly not the clear and simple beast it first started life as.

The only innovations for smaller businesses are in fact coming from the FinTech area where online fund-raising structures with effective due diligence on both companies and investors are providing a valuable and viable alternative

 

The only innovations for smaller businesses are in fact coming from the FinTech area where online fund-raising structures with effective due diligence on both companies and investors are providing a valuable and viable alternative - and no, I don't mean most of the crowdfunders, which I fear may well be a disaster waiting to happen. The LSE could have led a valuable and responsible initiative here, but has instead chosen to stay in its comfort zone of the larger national and international combines.

 

I note that in 2007 the LSE had 241 companies coming to market, raising a total of £25.9bn.  Compare that to 2015 where there were only 78 flotations worth a mere £11.3bn. This is not a good measure of confidence or development, and yet we hear every day about the need for new longer term investment being made available for businesses. The result is that you end up falling back onto the providers of shorter-term Private Equity and Venture Capital, who, while having a role to play, are certainly not suppliers of longer-term equity investment.

 

The Financial Conduct Authority (FCA) is now looking to introduce some much needed reforms in this area and to try and remove some of the old "Spanish customs" that restricts the information provided to prospective investors. A two tier system exists whereby an "approved prospectus" for IPOs to institutions is only made publicly available once the shares start trading. Other than that investors have had to rely on the research provided by the analysts usually connected to the banks organising the sale. Just how independent a view is that? I have never yet seen one that rates their offering down as a ‘hold’ let alone a ‘sell’!

 

The FCA now wants to open this up to all, so the prospectus is available far more widely and that analysts of all colours and hues can have their say. This will be better news for investors and frankly a better way for the industry to show how it can operate. This still does not address though the larger matter of more IPOs being encouraged to come to market and especially those of smaller companies. Time in my view for some more radical common sense to re-engender some vim and vigour into the AIM market, reforming its operations, participants and allowing simpler access for investors.

 

Sugar & Salt - a marketing coup.

The recent political views over the sugar tax may have been negative for some drinks manufacturers. However for one company, they have thought this through very effectively to their own benefit. Mars Food, who apart from making the eponymous Mars Bar, also manufacture popular pasta sauces under the brand of Dolmio. Their advertising slogan for years has been "When’sa your Dolmio day?", but are now supporting the changes regarding sugar consumption by openly stating that their products should only be consumed once a week.

 

This in effect means that consumers will see this style of product as being a standard weekly product to use, moving Dolmio away from being just another meal alternative. It basically becomes a regular weekly meal for the nation. A brilliant spin on a new tax that seemingly encourages people to buy the product as a weekly staple!

 

Prison Builder ends up in Prison.

Another of the endless set of tales of you really couldn't make up. Recently Immigration Officers raided a building site in Wrexham and arrested several workers who were apparently working illegally. One of the individuals arrested was detained in prison following the raid. And the building site concerned was the UK's newest prison HMP Berwyn. 

* * * 

And finally… so do you want to support Trump? So…just how far are you prepared to go?

 

Republican presidential-hopeful Donald Trump appears to have attracted such passionate supporters that a New Jersey man may face a $2,000 fine or 90 days in jail for flying a flag emblazoned with the billionaire candidate's name over his home.

 

Local officials said the flag violates an ordinance prohibiting the display of political signs more than 30 days ahead of an election and issued him with a summons.

 

For weeks, Hornick has hoisted a blue flag with Trump's "Make America Great Again!" campaign slogan on the pole outside his two-story West Long Branch house. Despite being issued with the summons on 25 March for the violation, Hornick apparently intends to keep it flying.

 

"The fine can be in the millions of dollars! That flag will never come down!" he wrote in a defiant Facebook post. Frankly, I think there are far better things we can waste our money on than Mr T.

 

Have a good week!

 

Justin Urquhart Stewart
Co-Founder
Seven Investment Management

Justin Urquhart Stewart is one of the most recognisable and trusted market commentators on television, radio and in the press. Originally trained as a lawyer he has observed the Investment industry for 30 years whilst in corporate banking and stockbroking, and has developed a unique understanding of the market’s roles and benefits for the private investor.

 

This article represents a personal and light-hearted view from 7IM, and is based on current financial news and events around the world.  Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision.

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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