How to democratise the UK stock market, one research note at a time

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Could small be beautiful after all? Private investors once dominated the London stock scene, but they are now a much-diminished force. Nonetheless, ministers hope retail shareholders can play a role in reviving the sluggish UK market. 

Chancellor Jeremy Hunt wants to bring back the “popular capitalism” drive of the 1980s when selling taxpayers’ remaining stake in NatWest. He might introduce a “British Isa” in his March Budget as part of a drive to increase capital investment in promising companies.

Widening retail investors’ access to investment research would also help, according to an official review by City lawyer Rachel Kent. This would mean addressing the regulatory barriers that stop research providers sharing findings with the wider public. In addition, she has called for expanded coverage of UK companies, commissioned by a new platform. It would particularly focus on smaller companies, in which retail investors are disproportionately invested.

The idea is appealing. More research, disseminated to more investors, might spark more interest in smaller companies, increasing valuations. That would reduce their cost of capital, making it easier for them to grow. 

However, the idea has met a sceptical response from analysts most likely to carry out the work. A majority of members polled by the European Association of Independent Research Providers said it was unlikely to be effective or workable. They were, however, almost universally positive when told they could assume a realistic and sustainable funding model. 

The big question — as with most things in life — is who pays, and how much? Similar projects in other countries have variously tapped the stock exchange, government or companies for funding. The more ambitious the scheme, the bigger the funding problem. Given there are 1,291 quoted companies with a market cap below £500mn in the UK, the plan for at least three analysts to cover each company seems expensive. Restricting eligibility would cut costs. Australia’s scheme only provides factual data with no analysis or commentary for the very smallest companies.

The Treasury, which has accepted the Kent review recommendations, might be willing to stump up — perhaps through a stamp duty rebate — to get the scheme off the ground. But the more expensive the project, the less politically palatable it will be to subsidise research disproportionately used by wealthy individuals. There may also be qualms about the propriety of encouraging investment in smaller companies. The sector boasts long-run outperformance of about 3 per cent a year relative to larger companies. But small companies are also volatile and risky.

There would be wider benefits. Investment analysts are more reliable than online “finfluencers” and celebrities who guide many younger investors. Promoting fundamentals-driven investment over meme stocks and cryptocurrencies would benefit individuals and the economy alike.