Can the UK reclaim its capital markets momentum?

We're increasingly confident in the direction of travel, early days, but it's a positive. And the good news is that we may finally have the ingredients in place. The question is whether we can turn that resilience into a genuine growth story. The UK's capital markets have had it a little tough in recent years. Headlines have focused on a shortage of IPOs, companies leaving the London market, and growing competition from other financial hubs like New York. Yet, the picture may be starting to change. Welcome to This Is Deutsche Bank, the podcast looking at news and trends in and around banking and finance. My name is Vicki Garrett, and in this episode, we're diving into the findings of Raised in London, at annual survey of 150 leaders from UK listed companies. We'll explore where the confidence is finally returning to the UK's capital markets, what's driving renewed investor interest in London as an investment destination, and what still needs to happen for the city to strengthen its position as a global financial centre. Today is Monday the 7th of September, let's get started. So I'm joined today by JT, James Taylor, Head of UK Investment Banking at Deutsche Bank, and Sanjay Rodger, our chief UK economist. Gentlemen, thank you both for joining us today. Now for those who aren't familiar with it, Raised in London is a survey of 150 board directors and senior leaders at UK listed companies, in which we ask for their thoughts and outlook for the country's capital markets. Before we turn to the results, anyone looking for a little bit more context on the UK capital markets can find it in last year's episode of the report, which is listed in the show notes. So let's just dive straight in JT. What are you hearing? I'd say overall cautious optimism. What do I mean by that? Over the last few years, we've seen increasingly positive sentiment from the respondents, the survey, and that's directors from UK listed companies. And if we look at specifically this year's report, 87% of the respondents see increasing appeal of the UK capital markets and the investment appeal of the UK over the last 12 months. And 97% of respondents see London as a trackative market for IPOs and for raising capital. So that's really positive relative to, I guess, a bit of pessimism that we've seen in recent years. Now, what's contributing to that? Definitely, the regulatory and market reform we've seen in the UK has helped, and the UK is definitely more competitive on a capital markets basis than it has been historically. Also, the government's growth agenda and its focus on the financial services industry and investment into the UK is setting a more positive tone. And indeed, Annie Burmese, your government seems to be continuing that trend from a policy agenda perspective. And again, that's contributing to this sentiment. And then over above that, we're seeing more interest in international investors or renewed interest in UK assets and UK businesses, which is very positive. And is this principally a change in perception? Or are you beginning to see it reflected in activity on the ground? And if so, where are you seeing that? Sure. I mean, if we look at the results of the survey, there's growing expectations amongst the respondents around increasing levels of IPOs, M&A, capital markets, fundraisings in the UK over the next 12 months. So that optimism is good. I'd say that market activity levels are lagging that slightly, but we're beginning to see better signs, which shall, well, I'll come on to in a second. Equally, we're seeing increased international investor interest in the UK. And one lens of that is, as I said, these are UK listed companies and the boards of those companies. 85% have seen more international investment on their share registers over the last 12 months. So again, that's showing that increased evidence of that increased interest. We're also seeing our clients be more active. Some clients have raised primarily acting in the market. We've seen some secretary fundraising. M&A is particularly busy. And from an IPO perspective, the pipeline is building. And there's a good quality list of companies across many sectors that we hope will come to the market in the coming months and as we head into 2027. I guess the note of caution to sort of play against that optimism is that that activity levels are below historic norms. And therefore, we need a little bit of realism, but generally very positive signs. And Sanjay, let's talk about the economy behind the market. How would you describe the UK's economic position today? Did the fundamentals support this optimism? I think so, Vicki. I mean, the UK is faced. It's fair share of had Queen's over the last several years. We've had high inflation. If you remember, four years ago, we had CPI peaking at double digits, 12%. We had tight amount of policy. Interest rates were taking from 0% all the way up to about 525. We've got multiple energy shocks. We had the Russian Ukraine crisis, then of course, we had the Middle East crisis. This year, that's certainly pushed up gas prices, electricity prices, pump prices. We've had political uncertainty more so than I can count in the UK. And of course, we've have heightened geopolitical shocks, whether it's trade war and the like yet, I would say, the UK economy has been more resilient than we expected, including us, by the way. And we've been pretty optimistic about the UK economic outlook. In fact, no G7 country has grown as fast as the UK has in the first half of this year. And what's staggering about that is that it's coming on the back of this real income shock that we've seen from the Middle East. It's coming on the back of no interest rate cuts that we've thought we could see at the start of this year. So even though higher energy prices are eating into households and business budgets, we aren't seeing more and more resilience. Households are spending money, which is good. Businesses are still investing in the UK. And that's fantastic. Credit conditions have been supported for growth, which is crucial for having and building and sustaining that growth. And we're starting to see broader signs of a larger investment cycle take place. So technology, AI infrastructure, communications, R&D, intensive sectors, all of these things have been showing up more positively in the data. And it's not just GDP growth that's rising, by the way, which makes me more optimistic about the UK economy. It's GDP per capita. It's the so-called variables that tell us a little bit more about living standards. That's been rising. Productivity trends. That's picking up from your stagnant levels over the last decade, prior to what we had before the pandemic. And we find ourselves, I think, in a very familiar place, which is we find ourselves devising up our growth projections as almost all forecasters have been doing. And the UK's structural strengths go back to your question. I think they do remain under-imprisated. We still have world-class universities. We still have deep capital markets. We still have a flexible labor market. We have strong institutions and a remarkable ability to track talent and investment. And those advantages have just not disappeared. And that's, I think, the good news. So do the fundamentals justify some of the renewed interest that JT was talking about in UK assets and UK POC? Yes, I think so. But for that optimism to become something a bit more durable, we need the recent pickup and investment to translate into stronger productivity. So we are seeing signs of that. That's good, but it needs to be sustained. We need to see that translate into higher real incomes. We need to see that translate into faster real growth. And that, ultimately, is the test. So we need to see the city also do better a better job of selling itself. Investment promotion is something that I think is severely underappreciated. The question is, whether we can turn that resilience into a genuine growth story? Yes, and JT, there's also an interesting tension in the findings, isn't there? Despite the renewed confidence, it says that 75% of respondents have considered dual listing or moving their listing to another location altogether. 78% believe UK listed issuers remain undervalued relative to their global counterparts. What do you think might determine whether companies ultimately choose to stay in growing London? I think the tailwinds, let's call them that Sanjay's describing, means that we're increasingly confident in the direction of travel early days, but it's a positive. To the day she suggests, look, I think that tells us that boards have been looking at the topic of the health of the UK market. Does it continue to be the right place for companies to be listed? Generally, we're not seeing many boards action that debate. In terms of proactive moves or changes, there are a few. Generally, there are for good strategic reasons. Take Lenko, for example, that's recently announced that it's looking to add a Australian listing to its London listing. Those things are sensible, but we're not seeing a wholesale move of companies abroad, but it's a topic that is on board's mind, so I think that's fine. So, direction of travel good, there's still some structural challenges. There's been a lot of progress, but if we think of the sources of friction, there's operating costs within the UK, there's executive remuneration, there's governance questions, and they appear in the survey. But probably the most important one, and again, Sanjay alluded to it, is how do we attract increased capital to both the UK public markets and the UK private business to help them scale and grow and stay in the UK, effectively, through their life cycle? We're starting to see, as I said, greater international interest and investment, [BLANK_AUDIO] we need to promote greater domestic investment. And again, that's a topic that's widely covered in the press and really is the last outstanding gating item, I think, for the capital markets and attracting that capital. So it's a balance. I think there's a changing narrative that's needed, more positivity than negativity. I think there's more reform, both regulatory and market reform that's needed, but it's really that mobilizing greater capital investment in the UK that is the key as we go forward. Yeah, when we've been talking about public markets, but we've actually been seeing a flurry of take privates recently. What's behind that exactly? Again, that generally, there's a general negative tone when you read about that and clear it's disturbing if the UK market's shrinking because companies are being taken private, but equally the cut path full version of that is a vote of confidence, yeah. The quality and long term potential of the UK businesses or a bit is listed in London. So over, I think it's a positive sign. Clearly, without the reciprocal IPO activity to bring new companies to the market, it's a short-term question, but equally we've seen many private transactions over the years. We just happen to see that trend continue in the absence of a healthy IPO market. So generally, I think it's a positive sign. I think disciplined M&A helps companies scale and grow, which we would support. And indeed, we advise many clients around that. It does also hint no potentially to the fact there might be a valuation gap between the UK and other markets, particularly the US and again, quite a lot of press narrative and discussion around that. But again, I don't think that talks to the quality of companies that are listed in London. Yeah. It points to the fact that they are quality businesses that just might be at a valuation point that makes them even more appealing to international investment and acquirers. But again, coming back to the survey, 90% of the respondents think that private X in particular are going to use IPOs increasingly as an exit mechanism for their portfolio companies as we move forward from here. We're starting to see that in the IPO pipeline growing, particularly from sponsor firms. And so again, we see that as a positive sign that we're coming out of the doldrums. Yeah. And we should see a bit of normalization back to historic norms in terms of IPO balance. Good stuff. And over the past year, headlines have been dominated by geopolitical tensions, changing trade relationships and uncertainty over tariffs. At the same time, investors have increasingly looked beyond the US for opportunities. Sanjay, is this changing the relative investment case for the UK at all? I think so on the margins. In the conversation that we're hearing from clients has very much shifted quite materially over the last year or so. Investors are no longer asking whether they can own anything outside of the US. In fact, what they're now asking is whether they're overexposed to the United States. And I think that's the key question for markets and goes back to what JT was saying earlier on. And by the way, it's not a bad view or negative view on the US economy. We're very constructive on the US economy. It's more reflection of valuation. It's more reflection of concentration risk. It's more reflection of uncertainty around the geopolitical environment that you mentioned, Vicky. So in that environment, I think the UK starts to look a little bit more interesting. For a long time, UK assets traded at a persistent discount because investors questioned the growth outlook. And this is something that I think JT you touched upon. It's very important in the context of where we are today. And those concerns, I think, still are pretty valid. Valuation discount is still very much there. What's changed or what's changing, I think, is the growth story. We are arguably seeing some improvement on the margin. And that makes me a little bit more optimistic, economic activity, as I mentioned. That's remained surprisingly resilient. Business investment, of course, has picked up. So that's getting us more confidence in the UK markets. And we're seeing greater interest in areas such as AI infrastructure, technology, research intensive sectors, and again, another big positive. So UK business investment, by the way, also continues to have pace most of our G7 peers. And that, I think, is very important when it comes to testing deep capital markets. It's a precondition, I think, in terms of what we need. But more broadly, we are seeing a gradual repraisal of international opportunities when we talk to clients. So if global investors become even slightly more willing to diversify away from the US, the UK doesn't need to be the world's fastest-growing economy to really benefit from this. It just needs to look incrementally more attractive. So it looks like the tide might be turning for the UK's capital markets. So let's end with some crystal ball gazing. Sanjay, what do you think needs to happen for this optimism to translate into tangible deal-making? - Well, I love a bit of crystal ball gazing, is what we do. Look, I think we're closer to where we were 12, 24 months ago. But there's still a gap between optimism and execution. And I think JT would certainly buy into that. The next step is turning that confidence into action, right? That's what we really need. That means more companies choosing to invest in the UK. It means more sponsors putting money to work, more firms willing to tap public markets. And of course, as a role for government to play, JT, you mentioned the Burnham government. Of course, we're waiting to see what this budget looks like, the inaugural Burnham Healy budget. Let's see what kind of environment they create for investors. But from a UK perspective, I focus on three things that makes me a little bit more optimistic, stronger productivity, as I mentioned, continued investment and deeper capital markets. So productivity matters because it's ultimately what drives earnings growth, right? Investment matters because it creates the capacity for future growth. And that's very important. And deeper capital markets matter because innovative firms need somewhere to raise capital and scale. - JT, how do you feel about sun days? How feasible is that? And what else if anything's needed? - I like what I hear. No, I would agree with all of that. Probably the anything I would add from a capital markets perspective is that the capital markets tend to be quite sentiment-driven. So as we see some or all of that playing through, as we see activity levels rise, as we see, for example, more list of clients in the UK raising primary capital to fund growth. As we see a greater uptick in IPO volumes, that sentiment shifts pretty quickly. History tells us. And I think that will be the icing on the cake, as it were, as momentum builds. - Yeah, thank you, both of you for being on the podcast. It's been a great discussion. - It's a pleasure. - Thanks for having us. - And thank you for tuning into This is Deutsche Bank. 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