A recent report has raised concerns that UK small-cap stocks are facing an ‘existential threat’, urging policymakers to act quickly to prevent further decline in the sector.
As reported in the Financial Times, asset manager Abrdn has called for the abolition of stamp duty on shares of smaller British companies as part of measures to protect and revive this crucial part of the economy. Currently, stamp duty is set at 0.5% on most UK stocks, but London’s junior Aim market is exempt. Abrdn proposes extending this exemption to all companies outside of the FTSE 100, or at least the FTSE 250.
The warning comes as a think tank, New Financial, highlighted the significant shrinkage in the UK’s small-cap market, where around 600 companies with a market value of less than £1 billion have delisted over the past 20 years. One key reason for this decline has been the collapse in demand from UK pension funds, which have shifted to global portfolios. There were once as many as 18 local government pension schemes holding significant investments in UK small-caps, but today only one remains committed.
Sir Douglas Flint, chair of Abrdn, emphasised the importance of smaller listed companies, noting that they drive innovation and create jobs nationwide. He warned that policymakers cannot afford to overlook small-caps when looking at ways to boost investment in the UK. William Wright, founder of New Financial, echoed this sentiment, saying that UK smaller companies are facing an ‘existential threat’, primarily due to reduced demand from pension funds and retail investors.
Despite the challenges, the report noted that smaller UK companies have delivered solid long-term returns, with annualised total returns of 7.4% over the past 25 years, which is in line with the US S&P 500. Abrdn suggested expanding the Mansion House compact to include small-cap stocks and urged broader reforms to encourage investment in the sector.