In her Mansion House speech, the Chancellor set out a series of reforms aimed at stimulating UK economic growth. Part of this involves a drive to increase participation in Stocks and Shares ISAs.
These are called the Leeds Reforms. If they succeed, they could provide a big boost for British businesses – but could they also lead to a bull market for UK stocks?
UK growth
Most of the time, businesses grow by making investments. This involves opening new sites, taking on more people, developing new products, and so on.
The trouble is, all of this costs money. And while companies can use their own profits, they have two options if they want to grow faster. They can either borrow it (by taking on debt) or ask investors for it (by issuing shares).
In the UK, however, there are a couple of issues. The first is that banking regulations introduced after the great financial crisis reduce competition among lenders, making debt more expensive.
Relatively low share prices also make issuing equity an expensive way of raising cash. But the Leeds Reforms announced by the Chancellor are designed to combat both problems.
Leeds Reforms
On the debt side, the Leeds Reforms are looking to make lending more competitive. Primarily, this involves relaxing some of the restrictions on smaller banks, freeing up capital for loans.
As with most things, more supply means lower prices. So the idea is this should translate into better opportunities for businesses to pursue growth projects with cheaper debt.
On the equity side, the Chancellor announced plans to encourage long-term savers to invest in stocks, rather than sticking to cash. Increased demand for stocks could help drive up prices.
That would mean companies can raise more cash by issuing fewer shares, making more projects viable. And the resultant earnings growth could send share prices up even further.
An example
One example is LondonMetric Property (LSE:LMP). The firm is a real estate investment trust (REIT) that has been expanding its portfolio of warehouses and industrial distribution centres.
The trouble is, REITs have to distribute 90% of their taxable income to investors as dividends. That makes them very attractive income investments, but it limits their growth prospects.
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LondonMetric Property’s investments in the last 10 years have caused its share count to more than triple and its long-term debt is up 270%. The moves have worked, but they’ve been expensive.
There’s a risk that cheaper debt might drive up property prices, making acquisitions more expensive. But the real estate sector looks to me like a potential beneficiary of the Leeds Reforms.
Bull market ahead?
Since 2008, UK shares have been hindered by a couple of things. One is the set of regulations that have limited earnings growth and the other is a lack of interest from retail investors.
The Leeds Reforms aim to change both parts of this. And if they succeed, UK stocks could get a double boost from more favourable trading conditions and more investors willing to buy shares.
The sector I see as a clear beneficiary is real estate – more specifically, REITs. And with a dividend yield above 6%, I think LondonMetric Property is worth considering at today’s prices.
