A respected analyst is warning the ‘relentless’ pace of de-equitisation driven by depressed UK stock market valuations will continue unless action is taken.

Low valuations are making the UK stock market an attractive hunting ground for acquirers and are a key factor behind the ‘minimal’ IPO (initial public offering) activity of the last two years which needs to be ‘actively addressed’ Peel Hunt’s (PEEL:AIM) head of research Charles Hall warns.

Hall points out the pace of UK merger and acquisition (M&A) activity accelerated through 2023, a year in which 40 transactions worth more than £100 million were announced with takeover activity predominately targeted in the smaller company space.

The 12-month period saw greater activity from overseas acquirers eager to bag UK stock market bargains, with the technology and leisure sectors receiving the most bids, seven and five respectively. As the pie chart shows, healthcare companies were also high on bidders’ shopping lists and should be again in 2024.

As Berenberg points out, M&A remains ‘a key theme in the pharma sector’ following a recent flurry of deals announced by AbbVie (ABBV:NYSE), Bristol-Myers (BMY:NYSE), AstraZeneca (AZN) and GSK (GSK).

The first quarter is ‘often a busy period for pharma M&A announcements, fuelled by industry conferences early in the new year’, adds Berenberg.

Not only has the pace of companies leaving the UK market accelerated, but the hopper also isn’t being refilled and more UK companies of scale are undertaking IPOs across the pond, says Hall, who believes concerted action is required to ‘maintain the health of the UK equity market and ensure that it provides the necessary growth capital for companies’.

While there is no silver bullet, Hall says government and regulators have ‘plenty of levers to ensure that London returns to a leading position for IPOs, which would not only stimulate greater activity in the UK, but also drive inward investment’, and that ‘concerted action would reverse the decline and return the UK to its previous standing as a leading destination for growth companies’.

Suggestions from Hall include reversing the 30 consecutive months of negative UK equity fund flows by boosting demand through ‘encouragement of pensions, insurance companies and retail investors’, as well as increasing the attraction of being listed by introducing corporation tax incentives and improving equity schemes.

Other solutions could include reducing the costs of preparing for an IPO, which could be made tax allowable, as well as improving the IPO after-market and encouraging active fund management, which is being squeezed out by the trend towards passive investment.

Levelling the IPO information playing field for retail investors and making it mandatory for all companies undertaking an IPO to have a retail offer, as happens in Hong Kong, might also make IPOs more attractive, according to Peel Hunt. 

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