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London stock market is ‘structurally broken’, warns broker

An economist at a leading City stockbroker has warned that London’s market is “structurally broken” as companies trade a fifth lower than overseas rivals.

Panmure Gordon’s chief economist Simon French said reduced investment in UK stocks had created a self-reinforcing “doom loop” that left them significantly undervalued.

French said the lack of attention given to the issue in the Autumn Statement meant the problem is unlikely to be fixed anytime soon.

A raft of new rules from Jeremy Hunt, the Chancellor, known as the Edinburgh reforms “implicitly acknowledge” the issue, said French, but he added they do not go far enough.

He said: “We have got ourselves into a funk and you need some pretty dramatic reforms. Because the UK market has underperformed for a long period of time, it has become, in my view, pretty self-fulfilling.

“The people investing your pension are saying it’s underperformed, therefore, we want to allocate less to it. You get in a bit of a doom loop.”

His comments echo recent concerns made by a group of FTSE 100 chief executives who urged Hunt to end the “vicious cycle” of Britain’s stock market decline.

Noel Quinn, the chief executive of HSBC, and Helge Lund, the BP chairman, were among the signatories of a letter sent by the Capital Markets Industry Taskforce, which said London markets must be made more attractive for investors.

French said regulation about what assets pension funds can own was part of the problem, as was the growing popularity of technology stocks in the US.

“Steadily over the last 20 and 30 years, regulators have done things that have disincentivised pension funds from holding UK equities,” he said.

“At the same time, the retail investor has gone into things like Tesla, Amazon and Google. You’ve got this perfect storm.”

The comments from French come amid warnings that Britain’s market for small and medium-sized stocks is rapidly shrinking, undermining London’s reputation as a global hub.

This came to the fore last month after US conglomerate Mars acquired UK-listed Hotel Chocolat for £543m, the latest example of a growing appetite among international buyers to snap up undervalued London stocks.

Investment bank Peel Hunt last month warned that more companies are leaving London’s markets than joining.

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