UK small-cap stocks face ‘existential threat’, report warns

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Asset manager Abrdn has called for stamp duty tax on shares in smaller British companies to be scrapped following a warning that the sector faces an “existential threat” as it continues to shrink rapidly.

The fund group said measures should be brought in to protect and support small and midsized listed companies in the UK, including “immediately abolishing” stamp duty on the purchase of FTSE 250 shares.

Stamp duty is levied at 0.5 per cent for investments in most UK stocks. London’s junior Aim market is exempt from stamp duty, but Abrdn said this exemption should be extended for all companies — or at least all of the companies outside of the largest 100.

The asset manager’s call comes as New Financial, a think-tank, released a report on the state of UK smaller stocks, noting that about 600 companies with a market value of less than £1bn have delisted over the past two decades.

Policymakers are attempting to galvanise the UK’s capital markets amid concerns that businesses are seeking to leave the London market and list in the US in search of a higher price tag.

The report by New Financial said that one of the key reasons for the drop in UK small-caps has been the collapse in demand from UK pension funds. Just one local government scheme has a specific holding in UK small-caps — compared with 18 schemes just over a decade ago.

“Smaller listed companies are an integral part of the UK economy,” said Sir Douglas Flint, chair of Abrdn. “They drive innovation and generate wealth and jobs across almost every corner of the country.

“If policymakers consider what can be done to boost investment in the UK generally, we cannot afford to ignore UK small-caps.”

William Wright, founder and managing director at New Financial, said: “Our report argues that UK smaller companies are facing an almost existential threat.

“There are many factors behind the decline but the collapse in demand from UK pension funds — which have increasingly switched to globalised portfolios — and the decline in demand from retail investors have been the main drivers.”

However, the report noted that over 25 years, UK smaller companies including London’s junior stock market Aim actually generated an annualised total return of 7.4 per cent — in line with the US S&P 500 and nearly 50 per cent higher than the wider UK market.

Abrdn said it wanted the Mansion House compact, in which major pension funds made a voluntary pledge to put more money into private markets, broadened to include listed small-cap stocks in the UK.

The fund group noted other measures that could encourage investors, such as pension funds, to back the UK more generally, including increasing the minimum contribution to workplace pension schemes via auto-enrolment, which currently stands at 8 per cent.

Abrdn also suggested a campaign to “get the UK investing” and a simplification of Britain’s tax-free individual savings account (Isa) industry to make it easier for people to invest.

Other companies, such as investment platform AJ Bell, have called on the government to simplify the Isa market by reducing the several products available to just one, within which investors can switch between cash and stocks.

In a separate report, Barclays also suggested reviewing stamp duty on UK stocks, which raises about £3.8bn a year for the Treasury.

“If we want the UK’s public markets to revive, be strong and sustainable in the long term and be internationally attractive, we need to find firms that are currently at a growth stage that are going to be the next big firms,” said Katharine Braddick, Barclays’ head of strategic policy.

However, other think-tanks believe the Aim market, which lists companies with a market value of less than £30mn, is not fit for purpose.

A report from the Tony Blair Institute for Global Change and the centre-right think-tank Onward said that Aim should be scrapped as it has “failed in its stated purpose of providing a home for scaling businesses”.

“It should be fully merged with the LSE’s main market, with a special route to listing specifically for high-growth firms in emerging technology sectors,” the report added.