WIREDGOV

After the credit boom, changes of allocation by UK savings institutions could play a major role reinvigorating the domestic economy according to a new paper published recently by the think tank IPPR. 

The new paper, written by asset manager Gervais Williams, argues that credit-fuelled asset markets have encouraged greater speculation, displacing more traditional long-term investment strategies. He argues this has worked against the interests of smaller, quoted, UK companies in particular and their role as key generators of domestic wealth and job creation. If they were put on a more even fiscal platform this trend could be reversed.

Gervais Williams, Managing Director of asset management company MAM Funds plc, writes:

“Dynamic smaller quoted companies help generate employment and drive a healthy economy. But in the UK, there has been a significant capital outflow from this sector of the market in the last decade – and this is constraining their ability to respond in these times of austerity.

“With around £1 trillion of assets, changes in asset allocation of UK savings institutions can have a major effect on the trends in the UK economy. The credit boom led to a shift of investment orientation. As credit growth accelerated after 1986, many assets rose in value, and investors have become more speculative in their behaviour. Increasingly they have become more closely aligned with stock market indices which have little representation of smaller quoted companies. And typically they have looked for capital gains across the globe, funding these changes by reducing allocations to UK quoted companies.

“Our large, international companies have offset the trend by bringing in a wider range of international investors, but it has become harder for smaller UK companies to raise equity finance given their reliance upon domestic savers.

“As the credit boom comes to an end we are faced with a growth hangover so reinvigorating our domestic economy and job creation has become even more important.  Currently, the tax system favours short term speculation. Speculative spread-betting in larger quoted businesses, for example, is tax free, while long-term investment in smaller quoted stocks is taxed at purchase and on the payment of dividends, even if those dividends are re-invested for the long-term.  Given the major role that smaller quoted businesses could have in the recovery of the UK economy, the Treasury should waive stamp duty on share purchases in smaller companies that fall outside the FTSE350 Index, and on any of their reinvested dividends.

“This £300m move would not only level the fiscal playing field for our smaller quoted businesses, but also encourage investment institutions to promote portfolios of smaller quoted companies. With greater institutional interest, there is scope for the smaller company sector to outperform the wider market again as it did before, previous to the credit boom.”

Notes to Editors

Gervais Williams paper - ‘Beyond the credit boom: Why investing in smaller companies is not only responsible capitalism but better for investors too’ - is available under embargo from the IPPR press office and will be published at: http://bit.ly/IPPR8606

The paper is the seventh in a series of IPPR’s ‘Promoting Growth & Shared Prosperity’ programme. Previous papers include:

·         Learning to live with the demon debt  - John Cullinane

·         Putting pensions to work: Economic easing and the role of pensions in promoting growth - Kees de Koning

·         The lost origins of industrial growth - Chris Benjamin

·         Women and banks: Are female customers facing discrimination? - Noreena Hertz

·         Reforming finance for a new era economy - Carlota Perez

·         The case against austerity today - Simon Wren-Lewis

Contacts

Richard Darlington: 07525 481 602 / r.darlington@ippr.org

Tim Finch: 07595 920 899 / t.finch@ippr.org