What's the point in encouraging UK S+S investment?

[Peterpetrole]

Just trying to understand from a company finance point of view -

Discussed on the radio a bit yesterday, speculation about ISA rules changing in the next budget to reduce cash ISA limits and get people to "invest in UK stocks".

Surely the UK company seeking investment only gets any money with a new share issue, which is a small part of the market? (I could be wrong, that's why I'm asking)

My perception is that most share investments (pensions etc.) are speculation based on company earnings P/E and people deciding if a stock is undervalued.

Me deciding to buy £5K of Unilever shares doesn't help Unilever financially? Or is this to do with pumping the share price and enabling companies to borrow more against a higher market cap?

[JoshSm]

What it looks like to me is the people who will cream fees off the top from providing the trading facilities are the ones doing all the lobbying, and all the 'financial benefits' being touted are just so much smoke and mirrors being used to justify something only really intended to force more business their way.

it's bullst being pushed at a clueless moron with the hope of a payday for those doing the lobbying, and what it does to investors, businesses or the economy isn't really factored in.

if you really want to promote investment you'd trim and simplify capital gains and liberalise dividends taxation.

[asfault]

Rachel from accounts can foxtrot Oscar with this idea. Invest in the uk? Every time a company wants to mine, build a factory, build a service centre, plant, grow, change use not change use people protest against it because some special blade of grass or tree that's 34 years old might be removed. No wonder the UK is struggling we stifle any kind of new building or growth.

[NowWatchThisDrive]

The idea is that the higher the price of a company's existing shares, the lower its cost of capital and the more favourably it can raise new money (both equity and debt) to then allocate on the activities and projects that ultimately contribute to economic growth - which then supports higher valuations and a lower cost of capital, and so on and so forth in a virtuous cycle.

Obviously there's also a degree of self-interest from the UK banks and brokers who've been pushing this most fervently, as the survival of these businesses relies on capital markets activity, and from fund managers whose performance would stand to benefit.

[JoshSm]

It's a convoluted way to reduce the cost of capital if that's the aim.

Also it takes some 'speshul' type thinking that the way to encourage an investment isn't to make it more attractive via liberalised tax treatment or whatever, but instead to actively block the alternatives so the unattractive investment becomes the only option.

I can see exactly why the first order thinkers lobbying for this 'solution' are doing it but it's still a stupid idea and more likely than not it *just won't work*.

[Peterpetrole]

NowWatchThisDrive said:

The idea is that the higher the price of a company's existing shares, the lower its cost of capital and the more favourably it can raise new money (both equity and debt) to then allocate on the activities and projects that ultimately contribute to economic growth - which then supports higher valuations and a lower cost of capital, and so on and so forth in a virtuous cycle.

Obviously there's also a degree of self-interest from the UK banks and brokers who've been pushing this most fervently, as the survival of these businesses relies on capital markets activity, and from fund managers whose performance would stand to benefit.

Thanks, that was my rough guess -

But if the lower cost of borrowing of a company is based on an "artificially boosted" market cap (ie punters like me being encouraged to make investments they wouldn't otherwise have made, more buyers than sellers so P/E increased) ..... isn't that going to increase risk down the road? Overextensions like RBS?

[NowWatchThisDrive]

Peterpetrole said:

Thanks, that was my rough guess -

But if the lower cost of borrowing of a company is based on an "artificially boosted" market cap (ie punters like me being encouraged to make investments they wouldn't otherwise have made, more buyers than sellers so P/E increased) ..... isn't that going to increase risk down the road? Overextensions like RBS?

Yeah, obviously the idea's contingent on the businesses that raise the capital then putting it to appropriate use on cash-generative activities that stimulate growth and everything else, rather than pissing it down the drain. And I was referring to the cost of equity capital - i.e. issuing new shares - not just debt.

JoshSm said:

It's a convoluted way to reduce the cost of capital if that's the aim.

Also it takes some 'speshul' type thinking that the way to encourage an investment isn't to make it more attractive via liberalised tax treatment or whatever, but instead to actively block the alternatives so the unattractive investment becomes the only option.

I can see exactly why the first order thinkers lobbying for this 'solution' are doing it but it's still a stupid idea and more likely than not it *just won't work*.

I wouldn't say convoluted, ultimately it's the idea at the heart of the capitalist model and the belief that that model is best for society and human progress. Obviously people are perfectly free to disagree with that idea.

Clearly it's not a silver bullet by any means, and all the other things you mention (and many more) need to be addressed. But for what it's worth, I've never considered it a particularly terrible idea. If you're going to give people a tax break for investing, why should it be primarily to the benefit of overseas companies and the detriment of domestic ones?

[superpp]

I honestly think Rachel's thinking is much simpler than anything to do with S&S.

She wants to tax the money in savings accounts, as most of the money in cash ISAs will start to go into regular taxable savings.
The average guy on the street won't be willing to invest as most people don't understand any of it.

[Peterpetrole]

NowWatchThisDrive said:

Peterpetrole said:

Thanks, that was my rough guess -

But if the lower cost of borrowing of a company is based on an "artificially boosted" market cap (ie punters like me being encouraged to make investments they wouldn't otherwise have made, more buyers than sellers so P/E increased) ..... isn't that going to increase risk down the road? Overextensions like RBS?

Yeah, obviously the idea's contingent on the businesses that raise the capital then putting it to appropriate use on cash-generative activities that stimulate growth and everything else, rather than pissing it down the drain. And I was referring to the cost of equity capital - i.e. issuing new shares - not just debt.

Thanks - but -

Isn't that potentially even worse? An artificially high share price that allows a company to issue a higher value of shares, but earnings haven't increased? Sounds like a bubble?

[JoshSm]

Peterpetrole said:

Thanks - but -

Isn't that potentially even worse? An artificially high share price that allows a company to issue a higher value of shares, but earnings haven't increased? Sounds like a bubble?

They probably want to recreate the 'success' of the US stock market where valuations become detached from the underlying reality and piles of money can be made, while UK stocks have generally done not much.

This of course is ignoring the cases in US markets where sentiment turns against a stock, the bubble pops, and all the gains evaporate in a >99% collapse from the peak even when little has fundamentally changed vs the garbage the stock was all along. Happened a lot of times in recent years, and it's inevitably retail investors left holding the bag while the big players have already walked away with the gains.

Either way it's a poor attempt at manipulation of the market if that's the aim, and it seems unlikely to be for the benefit of the investor.

[leef44]

I understood the idea came from lobbying from UK investment management i.e. self interest.

The argument goes: wow there are billions put in ISA cash savings which are for long term savings, just imagine if all that money was invested in UK companies. This would really boost the UK economy.

[SteveDubia]

leef44 said:

I understood the idea came from lobbying from UK investment management i.e. self interest.

The argument goes: wow there are billions put in ISA cash savings which are for long term savings, just imagine if all that money was invested in UK companies. This would really boost the UK economy.

There must be more to the plan surely ?
What’s to stop someone dumping it in an S&P tracker?
Even vanguard VWRL ( all world ) is only 3.6% U.K.
Or you could put it in a money market account in a S&S isa.

Or does she just assume people would invest in the U.K.?

[hidetheelephants]

Offer expanded EIS relief? Make it available for a wider range of UK companies? Not sure mucking about with cash ISAs is going to increase UK investment.

[PistonHead007]

SteveDubia said:

What’s to stop someone dumping it in an S&P tracker?

It's not difficult. Every product has a range of investments you can accces, you'd just have providers offering a narrower range of approved investments in a UK ISA.

[leef44]

SteveDubia said:

leef44 said:

I understood the idea came from lobbying from UK investment management i.e. self interest.

The argument goes: wow there are billions put in ISA cash savings which are for long term savings, just imagine if all that money was invested in UK companies. This would really boost the UK economy.

There must be more to the plan surely ?
What’s to stop someone dumping it in an S&P tracker?
Even vanguard VWRL ( all world ) is only 3.6% U.K.
Or you could put it in a money market account in a S&S isa.

Or does she just assume people would invest in the U.K.?

Rachel wasn't able to think that many steps ahead. Someone told her what you just said and she has now done a u-turn.

[SteveDubia]

PistonHead007 said:

SteveDubia said:

What’s to stop someone dumping it in an S&P tracker?

It's not difficult. Every product has a range of investments you can accces, you'd just have providers offering a narrower range of approved investments in a UK ISA.

Do you not think so?
The people investing in cash isa are risk adverse.
To make this work they’d also have to control what an individual can invest in a standard S&S ISA not just a “U.K. ISA”, else you’d just switch to a standard S&S ISA and stick it in a money market account.

I’m with Lee, it’s ill conceived and to make it work would have massive wider implications.
It sounds more like a drunken idea after a long session

[NowWatchThisDrive]

JoshSm said:

Peterpetrole said:

Thanks - but -

Isn't that potentially even worse? An artificially high share price that allows a company to issue a higher value of shares, but earnings haven't increased? Sounds like a bubble?

They probably want to recreate the 'success' of the US stock market where valuations become detached from the underlying reality and piles of money can be made, while UK stocks have generally done not much.

This of course is ignoring the cases in US markets where sentiment turns against a stock, the bubble pops, and all the gains evaporate in a >99% collapse from the peak even when little has fundamentally changed vs the garbage the stock was all along. Happened a lot of times in recent years, and it's inevitably retail investors left holding the bag while the big players have already walked away with the gains.

Either way it's a poor attempt at manipulation of the market if that's the aim, and it seems unlikely to be for the benefit of the investor.

I think there's room for nuance between this view & talk of fomenting bubbles, and the frankly absurd extent to which many quality UK companies have been structurally undervalued for a long time. Saying that, I do get the sense the market is finally starting to wake up and act on this - though not before the companies themselves, considering the recent prevalence of buybacks.

[PistonHead007]

SteveDubia said:

Do you not think so?
The people investing in cash isa are risk adverse.
To make this work they’d also have to control what an individual can invest in a standard S&S ISA not just a “U.K. ISA”, else you’d just switch to a standard S&S ISA and stick it in a money market account.

Spoiler alert, they already do. Some stocks can't be held in an ISA, only a general investment account. The stocks simply don't show up as available to buy in a S&S ISA.

Yes, it'd be a job to work out the list of approved investments but once done you'd have a separate UK ISA that only has access to them. No transfers.

[SteveDubia]

PistonHead007 said:

SteveDubia said:

Do you not think so?
The people investing in cash isa are risk adverse.
To make this work they’d also have to control what an individual can invest in a standard S&S ISA not just a “U.K. ISA”, else you’d just switch to a standard S&S ISA and stick it in a money market account.

Spoiler alert, they already do. Some stocks can't be held in an ISA, only a general investment account. The stocks simply don't show up as available to buy in a S&S ISA.

Yes, it'd be a job to work out the list of approved investments but once done you'd have a separate UK ISA that only has access to them. No transfers.

Very few people use an ISA to invest in shares, having said that in days gone by when my old IFA used Ascentrics ( now M&G), I’d regularly buy NASDAQ and NYSE listed stocks…

Are you suggesting the Standard S&S ISA would also only be able to be used for a “UK ISA” ( that would kill the industry over night)

You are massively over simplifying this

[PistonHead007]

SteveDubia said:

You are massively over simplifying this

You are massively over complicating it.

A cash ISA, Stocks & Shares ISA, Lifetime ISA and Junior ISA are already all separate products with their own respective rules and allowable holdings. A UK ISA would just be yet another ISA with its own constraints.