1. What’s happened to the UK stock market?
Activity has shrunk from its peak before the global financial crisis, with average daily traded volume on the FTSE All-Share Index falling to about £3.7 billion ($4.6 billion) in May 2023 from almost £15 billion in the same month of 2007. Investors tend to pay less for illiquid stocks as they risk a bigger loss when they come to sell. In early June, the MSCI UK share index was trading near a record 45% discount to its US counterpart, based on forward price-to-earnings ratios.
2. What’s the impact?
While London still rivals New York as a global financial hub, the LSE is being muscled aside by rival stock exchanges. The total capitalization of London-listed equities fell from a high of $4.3 trillion in 2007 to about $3 trillion in May 2023, according to data compiled by Bloomberg. Over the same period, the value of US stocks more than doubled to $44 trillion. Paris overtook London as Europe’s largest stock market in 2022. London is now the seventh-biggest globally, also trailing the US, China, Japan, Hong Kong and India, in a powerful reality check for an institution whose history stretches back more than 200 years. The decline began well before Brexit, the coronavirus pandemic and a deeper productivity crisis pushed Britain’s economic performance into the slow lane in relation to other Group of Seven developed nations.
In the early 2000s, the UK government introduced new rules forcing retirement fund managers to be more open about their investments and about how they planned to meet future pension obligations. One result was a shift out of riskier equities — the pension industry’s preferred investment until that point — and into safer government bonds. The trend was reinforced over the following decade as millions of workers holding so-called defined-benefit pension plans retired. Pension managers doubled down on government debt at the expense of shares so they could better match their long-term liabilities to those retirees. What’s more, what little equity allocation the funds retained was put increasingly into stocks in other markets as they tried to diversify their holdings. In 2000, Britain’s large defined-benefit plans held about 50% of their entire portfolios in UK stocks, according to the Investment Association. By 2021, that exposure had slumped to about 2%. The result was that the LSE effectively lost its biggest source of capital.
4. Aren’t companies still raising funds on the LSE?
New listings all but disappeared from London in early 2023, with three tiny companies floating in the first three months of the year. They raised $14 million, marking the worst quarter for the exchange since at least 2009. The underperformance was remarkable even in the context of a global drought in initial public offerings. London Stock Exchange Group Plc failed to secure the listing of one of the UK’s most important technology companies — Cambridge, England-based chip designer Arm Ltd. Despite fevered lobbying by government ministers, and an offer to relax UK listing rules, Arm’s Japanese parent company SoftBank Group Corp. chose New York for its return to public markets.
5. Why has London become less appealing for IPOs?
Aside from the relatively low valuations on offer, London’s allure has been tarnished by a glut of private equity funding and some woeful stock performances after high-profile listings, including Deliveroo Plc, Dr Martens Plc and Ithaca Energy Plc.
• In May, the co-founders of British financial technology firm Revolut told the Times of London that they were not considering a UK flotation, that the country’s regulatory environment was holding them back and London’s appeal was declining.
• Irish building materials company CRH Plc said in March it plans to shift its primary listing to New York from London.
• The same month, the Financial Times reported that British American Tobacco Plc was under pressure from a shareholder to move its listing to New York to tap a deeper pool of investors.
• In 2022, miner BHP Group Ltd. switched its main listing to Sydney, ending a dual arrangement with London that had dated back to the company’s creation in a merger 20 years earlier.
• Also in 2022, Abcam Plc, a Cambridge-based biotechnology company worth about $3.3 billion, moved its primary listing from London to the US Nasdaq.
• In 2021, plumbing and heating products supplier Ferguson Plc switched to the US after trading as a FTSE 100 company for several years.
It’s hard to draw a direct link. What’s clear is that Brexit has forced banks to beef up their presence in rival financial centers such as Paris, Amsterdam or Frankfurt. London is no longer thought of as the go-to listing venue in Europe, with some companies choosing Amsterdam, drawn by a more favorable regulatory environment. In 2022, the UK capital’s share of European IPO proceeds fell to 8%, the lowest since the global financial crisis.
7. What’s the UK doing about it?
The Financial Conduct Authority wants to replace its premium and standard listing categories with a single offering and make IPOs less complicated and onerous. It plans to make it easier for companies to have dual-class share structures, which are favored by some entrepreneurs who want to keep control of their businesses even after they have gone public. UK Chancellor Jeremy Hunt has been considering how to unlock more pension fund investment in the UK, but the pensions industry has warned him against forcing them to buy risky assets. Meanwhile the main opposition Labour Party has said it would seek to reform pension rules to boost stock listings, with Shadow Chancellor Rachel Reeves hinting in a Financial Times interview that she’d be prepared to force pension funds to invest in a national growth fund. The Tony Blair Institute, founded by the former UK prime minister, has proposed that the country’s thousands of small pension funds be combined to form a handful of global-scale funds as a way to improve returns for pensioners and deploy long-term equity for investment.
–With assistance from Loukia Gyftopoulou.
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