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The star of the London Stock Exchange is fading | fDi Intelligence Your source for information on foreign direct investments

The star of the London Stock Exchange is fading |  fDi Intelligence Your source for information on foreign direct investments

 


The value of IPOs on the London Stock Exchange (LSE) fell to new lows in 2023 as large numbers of companies opted to list in the United States. This prompted the British government to launch reforms to boost the appeal of the country's flagship stock market.

The list of British companies that have shunned the LSE to seek higher valuations in the United States continues to grow. Notably, and after much anticipation, British chipmaker Arm was listed on Nasdaq last year in the largest US IPO since 2021.

The primary market is not the only one to be under pressure. Companies already listed on the FTSE are also crossing the Atlantic. One of them is Dublin-based Flutter, whose board of directors has submitted a proposal to move the company's listing to the New York Stock Exchange, the company said in a statement in January.

These setbacks reflect broader business sentiment towards the LSE. British consultancy Teneo found that 81% of UK CEOs surveyed at the end of 2023 said the value of being listed in London had declined over the year. About a third of them have considered moving their registration abroad, according to the survey.

Several factors have determined the current disappearance of the LSE. In some ways, the stock market has faced a perfect storm. Regulatory hurdles have derailed local pension funds' investments in UK stocks. At the same time, rising shares of tech giants Magnificent Seven have pushed Wall Street valuations beyond reasonable, widening the gap with the LSE. Additionally, the global IPO market as a whole is on a downward trajectory as companies resort to alternative sources of capital to stock markets.

Many investors continue to view the glass half full, highlighting the discount at which UK stocks are trading. However, the contraction in the LSE primary and secondary markets suggests that a turning point is not yet in sight.

A dull year 2023

The total value of the 19 new share listings made on the LSE in 2023 fell below $1 billion ($972 million), the lowest level since data provider Dealogic began tracking listings in scholarship at LSE. London's share of global IPO markets thus remained below 1% for the second year in a row, Dealogic data suggests. Its heyday is now only a distant memory. In 2006, the height of its glory before the financial crisis, the LSE represented almost a fifth of global IPOs by value (17.7%).

The UK stock market has, once again, frustrated those who were convinced it was cheap and disappointed the expectations of those who said it was cheap for the right reasons, said AJ Bell, chief investment officer of the company that bears his name, in a press release. in December.

The quality of UK IPOs is also a concern. CAB Payments is now trading at a quarter of its listing price after revealing its key business was under threat from new foreign exchange rules in Nigeria. WE Soda, a Turkish soda production company, withdrew its IPO when investors balked at reaching the $7.5 billion market capitalization it was aiming for.

Another reason behind [UK equities lack of appeal] is it in long term capital pools such as UK pension funds [and] insurance companies have massively reduced their allocation to UK stocks in recent years, says Jason Hollands, managing director of corporate affairs at financial services firm Evelyn Partners.

With many UK defined benefit pension schemes closing and then transitioning to bonds and implementing liability-driven investment strategies, natural owners of UK stocks have been reducing their allocations, adds- he.

In 1997, the share of UK insurance and pension funds in UK-listed shares was a combined 45.7%, according to the Office for National Statistics (ONS). In 2022, this figure has fallen to 4.2% of UK-listed stocks, the lowest proportion ever recorded by both categories of investors.

This downward trend may be caused by several factors, such as companies expecting more profitable returns on foreign stocks as well as changes in pension fund regulations, the ONS noted in a press release. December.

With British institutional investors playing a reduced role, the weight of foreign investors increased from 35.7% in 2000 to 57.7% in 2022, according to ONS figures.

Reform program

Growing anxiety among CEOs and businesses has been accompanied by reforms outlined by the UK government. In July, UK Chancellor of the Exchequer Jeremy Hunt outlined the Mansion House reforms, which included a bill to boost the deployment of capital from UK pension funds to the LSE.

“I want the world's fastest growing companies to grow and list right here, making the LSE not just the Nasdaq of Europe, but much more,” Mr Hunt said in a statement.

This follows an announcement from the Financial Conduct Authority, the UK's financial regulator, that it would streamline listing rules, replacing its existing standard and premium listing segments with a single category for shares in trading companies.

Taken together, says Charlie Walker, deputy chief executive of the LSE, all these components constitute the biggest reform since the 1980s in what he describes as a body of work deliberately aimed at addressing all the elements that make up Britain's financial markets .

Mr Hunt admitted in his speech at Mansion House in July that London had lost 44% of its listed companies between 1997 and 2019.

Because no single factor is responsible for London's fall from grace, no single adjustment will solve all of the key issues holding back London's fall. Yet many City insiders remain optimistic about the future of the LSE.

Scott McCubbin, EY's head of IPOs in the UK and Ireland, says that despite losing IPOs to the US, London's fundamentals are strong.

The infrastructure is already well established: the investment community, the banking community and the advisor community, it's all there, he emphasizes.

But with fewer listings, the LSE is behind where it should be and must adapt to the new world order, he says. Did it fail? Absolutely not. Is a change necessary? Absolutely yes.

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This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence

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