Referendum jitters hit value of UK stock market flotations

Stock market flotations by British companies have slumped in 2016 because of fears about the outcome of the referendum on EU membership and the slowing economy.

Funds raised by UK companies have fallen to $3.3bn (£2.3bn) so far this year, down from more than $8bn in each of the preceding two half-year periods, Thomson Reuters figures show.

The figure is the lowest since the second half of 2012, when companies raised $2.9bn, and the third lowest since the second half of 2008 when the financial crisis reached its peak.

The value of UK flotations has almost halved so far in the current quarter to $1.14bn from $2.15bn in the first three months of 2016, as the EU referendum has drawn nearer. By contrast, the value of global IPOs has taken off, rising to $22.7bn so far in the current quarter from $8.9bn in a slow first three months of the year.

Viv Maclachlan, a capital markets director at the accountancy firm PwC, said companies had delayed going to the market because they feared wary investors would push the price of new shares down with markets in turmoil ahead of the EU referendum vote.

“The reason is absolutely the EU referendum and that has been pretty much the case since the beginning of April. People don’t like uncertainty and I don’t think investors, companies or any of us understand the ramifications of what it means if we leave,” she said.

“Investors don’t want to pay for things while there is uncertainty and the danger is you might be forced to undervalue your company.”

The IPO slowdown is the latest sign of jitters in the financial world over the outcome of the referendum with polls suggesting a very close contest. The health of the market is a measure of wider business confidence. In the second half of 2008, when Lehman Brothers went bust, no UK companies floated on the stock market as investors were seized by fear of economic disaster.

The FTSE 100 index sank to a four-month low last week before recovering slightly, and the pound has fallen heavily against the dollar. UK equity funds had their second largest withdrawals on record, the eighth straight week, as investors sold $1.1bn of shares in British companies.

Merger and acquisition activity has also fallen to a three-year low and at 4% is the lowest proportion of worldwide takeovers on record, according to Thomson Reuters.

William Charnley, a partner at the law firm King & Spalding, said: “In the short term, Brexit would increase uncertainty and would continue to limit investor demand for risk assets and therefore continue to inhibit capital raising.”

He said the EU referendum was part of the reason for the fall in IPO activity, but that the slowing economy also played a role. UK growth slowed sharply in the first quarter of this year as weaker global trade, reflected in low oil prices, and turbulence in financial markets reduced economic activity.

“We are in a low-growth environment in which capital spending is not the main focus, so there is less need to raise money,” he said. “Significantly, there is less investment internationally in resources and energy. Also, the pace of development in the corporate sector is slow, which is due to the dynamics of the real economy.”

Companies that have floated so far this year include Hotel Chocolat, the clothing brand Joules and the listings and city guides publisher Time Out. All three achieved the valuations they were seeking, but others such as Metro Bank, CMC Markets and Countryside Properties had to sell shares at the low end of their mooted price range.

After peaking in 2006, flotations slumped in the years after the financial crisis, but the market sprang back to life in 2013 as the economy picked up and the government sold 60% of Royal Mail. Activity reached record levels in the first half of 2014 as companies including AO World, Pets at Home and Poundland raised a total of $17.1bn.

Powered by article was written by Sean Farrell, for The Guardian on Sunday 19th June 2016 14.19 Europe/London © Guardian News and Media Limited 2010


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