What’s wrong with the UK stock market?

In 2000, the UK stock market was the second largest in the world, accounting for 10% of the global total. Now, it constitutes just 3% and is either the sixth or ninth largest, depending on the source of measurement.

With an absence of growth stocks (technology accounts for just 1% of the All-Share index), an absence of issuance either from existing companies or new flotations, and a relentless stream of takeovers and emigrations, there is no doubt that the UK’s position will drop further.

Floatations on North America’s stock markets raised $138 billion in the first half of 2026, including $86 billion from SpaceX. A total of $30 billion was raised in the Asia-Pacific region and €7.6 billion in Europe, but just £577 million in the UK. This was treble the total for the first half of 2025, but three-quarters of it came from the National Investment Fund of the Republic of Uzbekistan. The imminent flotation of Airtel Money will raise more, but this is a spin-off from FTSE 100 constituent Airtel Africa.

Meanwhile, six FTSE 100 firms (Schroders, Intertek, Beazley, DCC, easyJet and Segro) have disappeared through takeovers this year, as have numerous FTSE 250 companies, including Tate & Lyle, Bodycote and Senior. Flutter Entertainment has moved its listing to New York as have Carnival and AstraZeneca, although the latter maintains a secondary listing in London. There have been persistent rumours that Shell will follow.

The UK stock market’s cultural aversion to risk

The causes of the decline of the UK stock market go back to the late 1990s and the relentless programme of taxation, regulation and intimidation initiated by the Blair government, but continued by its successors. Gordon Brown’s first Budget removed the tax credit on dividends from UK companies, then worth £5 billion a year, while privatised utilities were chased into ownership by private equity, foreign companies or both. Pension regulators pushed pension funds into reducing equity exposure and solvency rules introduced after the 2008 crisis removed insurance firms from equity markets.

At the same time, globalisation encouraged investors to invest overseas while the UK had much less to offer overseas investors. The long bull market in bonds provided investors with an attractive alternative to equities and many larger UK companies, following the mega-mergers of the late 1990s, became complacent.

For a while, London’s stock market shrugged off these problems. Flotations continued. In the fall out from the bust in the technology, media and telecoms sectors and the subsequent commodities boom, Britain’s “old-economy” companies prospered. The prospect of a more market-friendly government in 2010 appeared to promise better times after a decade in which the UK had suffered two of its worst four bear markets in a century.

Unfortunately, while the technology sector in the US started to recover with the flotation of Google in 2004, it continued to decline in the UK. DeepMind chose to sell out to Google in 2014 rather than float and UK investors rushed to cash out of ARM in 2016 and of Imagination Technologies in 2017. With pension funds and insurance companies “de-risking”, the pool of long-term capital available for backing new companies or supporting established ones disappeared.

Yet as Julia Hoggett, CEO of the London Stock Exchange, points out, Britain has no shortage of capital – the fourth-largest source in the world – of which £2 trillion is in cash deposits. The problem is that it is not allocated to generate growth. “We don’t have an innovation problem,” she says, “we have a capital-allocation problem.” The UK has developed a cultural aversion to risk-taking and a persistent scepticism about technology, innovation and the market economy.

There are other problems, as Tim Campbell, CEO of Baillie Gifford, points out. More than 50% of UK-listed company shares are owned by passive funds, which take no interest in the companies in which they are invested. A further block is held by traders and hedge funds focused on short-term results. The lack of long-term shareholders makes a stock market listing unattractive. Companies prefer private equity, which offers more flexible financing, gives better incentives for management, lower taxation and lower corporate costs. Hence the UK is not the only market in which the number of companies is shrinking; the Wilshire 5000 index in the US has shrunk to around 3,500 companies from a peak of around 7,500 in the late 1990s.

The UK is waking up to the problem

The UK has at last recognised the issue. Listing regulations have been relaxed, pension funds have committed to invest more in the UK and the Treasury has made some minor tax concessions. However, this is tinkering and there is neither the appetite nor the funding from the government to go further.

The global bull market in equities rolls on, with the UK market keeping pace, thanks to takeovers, share buybacks and sharper management, yet UK investors continue to sell out. The Investment Association reports only one month of inflows into UK equity funds since July 2021, with outflows of £561 million in June, £1.6 billion in July and £615 million in August. Flows to the rest of the world, where investors see opportunities, are positive.

It’s taken a generation to wreck the UK stock market and it will take a generation to rebuild it. Tax and regulatory concessions will help, but changing the anti-equity investment culture in the UK is a monumental task, not helped by the lack of growth-orientated listed companies. Average house prices peaked in real terms 20 years ago, while even the underperforming FTSE 100 has doubled relative to housing, but the UK public is in denial. Maybe with inflation and taxation eroding the value of bank deposits and the relentless hostility of governments towards the private rental markets the pendulum, in the absence of another bear market, will swing back towards equity investment in the UK. But there is no quick fix.

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.