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Growth government: equity markets hopeful on UK IPO and ECM future after Labour election landslide

The UK woke up to a new government on Friday morning, with a storming victory for the Labour Party ending 14 years of Conservative rule.

Far from being despondent about government policy shifting leftwards, capital markets sources were broadly positive, hoping for a Labour-led revitalisation of the UK IPO market.

UK equity capital markets professionals were basking in stability – a far cry from the country’s tumultuous years after the vote to leave the EU in 2016.

“It’s a benign election,” said one ECM advisor, adding that many had taken comfort in the broadly centrist alignment of all three major parties, including the Liberal Democrats, which came third in terms of number of seats.

“It isn’t like 2019 at all and if you look at the US and EU, particularly following [French President Emmanuel] Macron’s decision to call snap parliamentary elections, the UK looks far less volatile. The UK is almost the adults in the corner in the room again on politics.”

UK equities were also positive in the aftermath of the election result. The domestically focused FTSE 250 shot up 1.8% in early trading in an immediate reaction to Labour’s win on Friday, before settling at just under a 1% gain into the close.

A second ECM advisor noted that “people are not put off by the Labour Party” and that the market moves in UK stocks immediately after the result made it clear investors were putting money to work on the confirmation of an expected result.

Growth engine

Labour and new UK Prime Minister Keir Starmer made economic growth one of the key focuses of the election campaign.

The first advisor, who has engaged with the party in the run-up to the election, said Labour has made clear that the City of London and capital markets were part of that effort.

“Labour are very focused on growth so anything they can do to stimulate it in the City is in their eyeline,” he said.

Labour published a plan for financial services in January, recognising the sector as “one of Britain’s success stories.”

The party pledged six policies on financial services which include: delivering inclusive growth of the UK’s financial service sector, enhancing the international competitiveness of the sector and reinvigorating capital markets.

On the latter, Labour pledged to review the pensions landscape, empowering the British Business Bank to invest more in venture capital and small-cap growth equity through establishing a British ‘Tibi’ scheme, a copy of a French scheme which encourages pension capital to invest in domestic companies.

“We need to do stuff to stimulate pension funds to invest in UK markets,” said the first advisor.

“The top end of the FTSE 100 and larger IPOs are not a problem as they get global investors, it is when you are below a billion in market cap where global investors don’t play and you have to rely on UK money, the issue is it isn’t there at the moment,” he said.

A third ECM advisor said possible regulatory changes means more optimism about London. “The game changer will be getting pension funds to invest in the domestic market,” he said. “In most European countries, pension funds play a major role in their respective bourses, and the key is to have the same dynamic in the UK.

The first advisor added that Labour could help stimulate more investment in equities through reforming stamp duty in shares, dividend tax credit or even some form of national wealth fund but added that there was a feeling that Labour might be more pragmatic on investment in home businesses than perhaps even the Conservatives, who could be more ideologically tethered to lassez-faire global free markets.

He added that Labour could look at France as a model, where the government actively invests in domestic equities.

The first source also noted that it was widely expected that Labour would be supportive of the Financial Conduct Authority’s (FCA) listing reforms, one of the key capital markets initiatives of the Conservative government.

Strong and stable

While market participants are hopeful about Labour’s plans, the immediate outlook for UK IPOs is more tentative.

Labour’s victory could have positive longer-term effects on UK equites, especially if some of the party’s private sector-led growth plans leads to increased investment in UK mid-caps.

But in the immediate term, the election result maintains a stable outlook for the UK and should help to solidify some UK ECM momentum.

“We hope for a bit of a bounce with a centre-left government that is both pro-business and looks to be more pro-EU,” said a fourth ECM advisor.

As this news service reported in its half year ECM highlights, the UK was the second best exchange nationality for equity deals globally, in terms of deal volumes.

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Source: Dealogic

A huge GBP 7.2bn rights (EUR 8.5bn) issue in National Grid [LON:NG] was widely celebrated by market sources as a testament to UK equity market liquidity. There has also been several muti-billion pound secondary sell-downs, notably in London Stock Exchange Group (LSE) [LON:LSEG] and Haleon [LON:HLN].

The second advisor added that he was working on several large UK trades likely to benefit from political stability.

London is likely to get one more significant IPO in 2H, the listing of Applied Nutrition, reported to be ramping up for an IPO in 4Q.

There is also the possibility of a listing for Singapore-based e-commerce firm Shein, although as this news service reported there are several operational hurdles to be overcome that might cause the listing to be delayed.

All sources noted they did not expect significantly increased IPO volumes until at least 2025. However, there are green shoots of hope with an ECM investor pointing to the successful listing of Raspberry Pi [LON:RPI] trading up over 50% from its IPO price.

“Raspberry Pi worked well irrespective of any LSE reforms and that is because it was well structured, this sort of deal shows that the onus of getting good IPOs out the door is banks being honest with their clients on achievable deal prices,” he said.

With the UK election done and dusted far earlier in the year than people expected, the medium-term political backdrop for the country is positive.

“The early election in the UK, if anything, is helpful given it is no longer going to be in October and November, therefore we have an autumn window from September to November free of any election,” said a fifth ECM advisor.

The Labour Party did not respond to requests for comment. HMT declined to comment.