Why is the UK stock market losing its global financial dominance?
The London Stock Exchange confronts mounting challenges as companies and investors increasingly look elsewhere, threatening its position as a global financial hub.
A shrinking financial powerhouse
The UK share 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 US markets continue to enjoy bullish growth, the story in the Square Mile presents a more sobering narrative.
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
London attracted just 17 company flotations in 2024, raising £777 million, while losing 88 companies during the same period.
Major companies like ARM and Revolut have opted to list in the more liquid and better-capitalised US market, leaving the UK behind in the global race for financial supremacy.
Furthermore, the UK market is shrinking at its fastest pace in a decade, with the number of listed companies declining from 3,250 in 2007 to fewer than 1,800 today.
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 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
Several factors contribute to the UK market’s struggles:
- Lack of liquidity: UK pension funds, which allocated 48% of their capital to UK equities in 2000, now invest just 6% of their £600 billion in defined contribution schemes into domestic stocks. This compares to 44% in the US. This shift has significantly reduced liquidity in the UK market.
- Disincentives for listing: A 0.5% stamp duty on share transactions raises between £3.2 and £4.4 billion annually for the UK Treasury but serves as a deterrent for companies considering listing in London.
- Low retail participation: according to abrdn, UK share dealing faces headwinds from the 0.5% stamp duty on transactions, leading to low retail participation. Savers invest only 8% of their wealth in stocks and mutual funds, compared to 33% in the US. Approximately £300 billion sit idle in cash individual savings accounts (ISAs), exacerbating the liquidity crunch. Many argue that his money could be put to better use: if invested in UK stocks, it could help the country’s economy grow.
- Outflows from UK equity funds: according to the Sunday Times, UK equity 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) activist funds launched 59 campaigns against UK-listed companies in 2024, the highest in Europe and the fourth-highest globally. Compare this to Germany’s 38, Switzerland’s 19 and France’s 12. These campaigns, while highlighting undervalued UK companies, signal vulnerability in the UK’s corporate sector.
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 £97 billion in economic output annually and employs 678,000 workers.
The shrinking UK market not only threatens the country's position as a global financial centre but also tax revenues.
Signs of potential recovery
Despite challenges, some positive developments emerge, including Shawbrook Group's potential £2 billion flotation.
Moreover, the UK government and financial regulators have signalled an awareness of the challenges, suggesting potential reforms to attract more listings and investment. These reforms, once implemented, may attract more share trading activity.
Reforms to taxation, improved incentives for listings, and efforts to channel domestic savings into equities could help restore confidence.
How to invest in UK shares
- Research the UK market thoroughly
- Consider both opportunities and risks
- Open a share dealing account
- Choose your investment approach
- Monitor market developments and adjust your strategy accordingly
Remember that while challenges exist, the UK market continues to offer opportunities for careful investors who conduct thorough research and maintain a long-term perspective.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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