Why is the UK stock market losing its global financial dominance?​

A shrinking financial powerhouse

​The United Kingdom (UK) stock market, once a bastion of global finance, is facing significant challenges as it grapples with liquidity issues, reduced investor confidence, and competition from more dynamic financial hubs. While the United States (US) markets continue to enjoy bullish growth, the story in the UK's Square Mile tells a more cautionary tale.

​This article examines the current state of the UK stock market in light of domestic and international trends, offering insights into its struggles and potential opportunities.

The UK’s shrinking market

The UK market is shrinking at its fastest pace in a decade, with listed companies dropping from 3250 in 2007 to fewer than 1800 today. London attracted just 17 company flotations in 2024, raising $971 million, while losing 88 companies during the same period.

• ​Major companies like ARM and Revolut have chosen to list in the more lucrative and better-capitalised US market, leaving the UK behind in the global financial race.
• ​Fundraising from initial public offerings (IPOs) in London fell by 9% in 2024, amounting to just $1 billion and ranking the UK 20th globally for IPO activity
• Markets a fraction of the UK’s size, as low as 1%, are now outperforming London in attracting new listings

US market growth and Republican policies: a global contrast

​The US stock markets have experienced two consecutive years of double-digit growth in 2023 and 2024, underpinned by a bullish sentiment fuelled by Republican control of both the Senate (majority of 4) and the House of Representatives (majority of 5).

​The Grand Old Party (GOP) is rushing to pass its legislative agenda before the mid-term elections in 2026, where history suggests they might lose one or both majorities. The robust US equity markets contrast starkly with the stagnation of the UK markets, which have struggled to attract capital and companies in the last decade.

Key challenges facing UK stock markets

• ​Lack of liquidity: UK pension funds now invest just 6% of their $750 billion in domestic stocks, down from 48% in 2000, compared to 44% in the US
• ​Disincentives for listing: a 0.5% stamp duty on transactions raises $4 billion to $5.5 billion annually but deters company listings
• ​Low retail participation: UK savers invest only 8% of their wealth in stocks, compared to 33% in the US. Around $375 billion sits idle in cash savings accounts
• ​Outflows from UK equity funds: according to the Sunday Times, investors have withdrawn £25 billion from domestic equity funds since May 2021, further undermining market confidence
• ​Activist campaigns: according to Alvarez and Marsal (A&M), the UK saw 59 campaigns against listed companies in 2024, revealing vulnerabilities despite highlighting undervalued firms.

Impact on the UK economy

​The financial and insurance sector contributes significantly to UK gross domestic product (GDP), accounting for 9% directly and rising to 12% when related professional services are included. The Square Mile generates $121.25 billion annually and employs 678,000 workers, underscoring its economic importance.

However, the shrinking market poses a threat to the UK’s status as a global financial centre and could significantly impact tax revenues.

Signs of potential recovery

Despite these challenges, there are promising developments:

• Shawbrook Group's considers £2 billion flotation
• UK government and financial regulators propose reforms to attract investments and listings, potentially boosting activity
• Proposed changes include tax reforms, improved incentives for listings, and channeling savings into equities to restore confidence.

While challenges remain, the UK market offers opportunities for diligent investors who conduct thorough research and maintain a long-term perspective.