Views & News

Catalysts for Change

| UK Equities
Mark Costar
Vishal Bhatia
16 Aug 2023

The first step to fixing a problem is recognising that you have one. Two important new initiatives have the potential to help revive the UK’s financial landscape. They may not be everything we need but in our view they are significant steps toward an overdue revaluation of UK business. 

The rollback of MiFID II

The first catalyst for investment was initiated by Chancellor of the Exchequer Jeremy Hunt. In a bid to revitalise markets, Hunt announced a U-turn on MiFID II, an EU piece of legislation which stopped brokers from wrapping research costs up with the commissions clients pay for trading. 

The policy was implemented back in 2018 with the intention of increasing transparency to allow for more independent, objective analysis. But it’s been highly corrosive for price discovery and liquidity - the exact opposite of what was intended. Faced with the prospect of paying for research, many investors chose not to, so the policy has ended up starving small- and mid-sized companies of the exposure to brokerage research that they need to attract investors. These segments have been disproportionately severely affected by the policy. 

Restoring the old, pre-MiFID II system will take time. But with it will come renewed coverage and interest among the smaller names which have been most impacted. We believe a restoration of transparency and an economic incentive to provide it will highlight the glaring anomalies in this part of the market. 

The Mansion House Compact

Hunt’s second catalyst is also a boost for the smaller end of the market, specifically for stocks listed on AIM. The Mansion House Reforms are set to unlock £75 billion of additional investment from pensions and deliver growth to unlisted UK businesses. 

The driver behind these reforms has been a lack of scale-up capital for small businesses. The UK may have a world-class ecosystem for start-up capital, but the stumbling block has come when businesses want to get past this stage and need further capital to accelerate their growth. Sometimes when scale-up capital is needed, the costs and admin of a listing are a step too far or come just a little too early. The US excels at providing an alternative, but the UK does not and this is what the Mansion House Compact finally aims to address. 

By unlocking a small portion of pension and insurance funds and directing those assets into unlisted UK businesses, a pipeline of vibrant, growth-oriented companies can come to market as they are ready. That means equity ownership will remain amongst local capital rather than with VCs and private equity. Plus, as AIM stocks count as unlisted equity, pension funds can invest in companies directly rather than putting their capital in big unlisted vehicles, so there could potentially be a major, new marginal buyer for those assets. 

To give an idea of the potential of these reforms, the Compact sizes the pension and insurance funds market at £4.6 trillion, of which just 1% is currently invested in UK unlisted companies. If the capital invested reaches the Compact’s 5% target, that would see an increase in UK unlisted investment of a staggering £184 billion. We think it’s unlikely to reach that number and estimate investment at more like £50 billion but given the total market capitalisation of AIM is £74 billion that’s still a very big number, especially considering this would all be net new money.  

Disinflation is coming

There is a persistent tendency to be pessimistic about economic prospects in the UK, but in our view a shift in perception is already overdue. Recent inflation figures show the UK is following the same downward trend as everyone else. We did take a little longer to get there than others, but we are not suffering from an insidious UK-specific inflation disease as some headlines would have you think. Markets are slowly waking up to this good news which will benefit domestic names and by extension, after an initial large-cap flurry, UK small- and mid-cap assets. 

A good opportunity for UK Growth

All in all, we think the UK has passed ‘peak toxicity’ and buying UK-listed growth opportunities now will expose investors to exciting, structurally growing businesses, frequently cases trading on significant and unwarranted discounts. 

Our pandemic excess savings still topple £200 billion, and unemployment is at a near record low. Sterling is just shy of an 18-month high and UK GDP outperformed expectations. The headwinds of the past year or so are now on the cusp of becoming tailwinds, which bodes very well for growth prospects. The companies we’re looking at and investing in are market leaders with strong balance sheets, in many cases exposed to profound structural change, such as artificial intelligence, decarbonisation, post-pandemic social change. In other markets, in the US especially, investors are tripping over themselves to grasp similar opportunities, and paying higher multiples for the privilege. 


Professional investors only. This is a marketing communication. Please refer to the fund prospectus and to the KIID / KID before making any final investment decisions. The investment promoted concerns the acquisition of shares in a fund or the investment strategy and not the underlying assets. Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. The information in this article does not constitute, or form part of, any offer to sell or issue, or any solicitation of an offer to purchase or subscribe for any funds or strategies described in this article; nor shall this article, or any part of it, or the fact of its distribution form the basis of, or be relied on, in connection with any contract. 

Source: JOHCM/Bloomberg (unless otherwise stated.)

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