(Bloomberg) —
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London’s investment appeal in a post-Brexit world is rapidly deteriorating.
After a tumultuous year in which it lost the top spot among Europe’s stock markets, London is now grappling with a slate of companies — including Arm Ltd., the jewel of Britain’s technology industry — ditching local listings in favor of the US. Beyond tech, firms such as CRH Plc, one of Europe’s largest building materials producers, see capital markets across the Atlantic as more attractive.
The trend is ominous for flagging initial public offerings in the UK. It also sets back efforts to transform what is widely perceived to be a dinosaur equity market that’s overly reliant on old economy sectors such as oil and banks. Coming at a time of stalling economic growth, it could mean more money leaving domestic equity funds after record outflows of $26.3 billion last year.
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“It does put London at a disadvantage from a longer-term growth perspective,” said Caroline Simmons, UK chief investment officer at UBS Global Wealth Management. “It is already lagging behind Europe and emerging markets in key drivers such as demographics and technological evolution.
“Losing new listings to the US will seriously hamper efforts to diversify the makeup of London’s stock market,” she added, “and is another notch against investor sentiment toward the UK in the long term.”
It is not the first time that blue-chip companies with headquarters in the UK have sought international listings. Since 2021, plumbing and heating products group Ferguson Plc and mining giant BHP Group have moved primary quotations to the US and Australia, respectively.
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Read More: London Suffers Another Blow as CRH Ditches Listing for NY
Investor sentiment toward British assets has particularly soured since the 2016 Brexit referendum. Until 2013, the UK had the biggest stock market as a value of gross domestic product in dollar terms compared with the US, Canada, France and Japan. It now has the smallest after constantly underperforming since 2016. The FTSE 100 and FTSE 250 indexes have also significantly lagged all major equity benchmarks in dollar terms over that period.
Politicians have lobbied to reverse that phenomenon. The government urged Arm’s owner, SoftBank Group Corp., last year to pick the UK alongside New York for the chip designer’s IPO. Arm, based in Cambridge, England, used to trade in London before it was acquired by SoftBank in 2016.
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But the lure of higher tech valuations in the US and a deeper investor base won out, and Arm has decided against selling shares on the London Stock Exchange, at least for now. Arm co-founder Jamie Urquhart criticized the British government’s long-term technology strategy this week, saying it “couldn’t be any worse than it is at the moment.”
Liquidity gap
A key accelerant in the move of some listings to the US is a lack of liquidity in the UK. The average daily traded volume on the FTSE All-Shares Index was equivalent to about £4 billion ($4.8 billion) in February 2023, compared to nearly £14 billion in the same month in 2007.
The size of the UK stock market has also shrunk over the past 16 years. The total market capitalization of London-listed equities fell from a peak of $4.3 trillion in 2007 to about $3 trillion this year, according to data compiled by Bloomberg. Over the same period, the value of US stocks more than doubled in size to $43 trillion. In a reflection of the deteriorating sentiment, France last year overtook the UK as Europe’s largest stock market. Globally, it is now the seventh-biggest equity market, behind the US, China, Japan, Hong Kong, France and India.
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Read More: FTSE Companies Seek Wall Street Move in Further Blow to London
Justin Gover, the founder and former chief executive of drugs company GW Pharmaceuticals Plc, initially listed the company on AIM in 2001, but moved to Nasdaq in a dual listing in 2013 and in 2016 scrapped the London operation altogether. “When one market is essentially driving the liquidity, which in our case was Nasdaq, it’s actually easier for investors in the UK to be trading the Nasdaq shares,” he said. “At some point there’s just a limited capacity to what we felt the London market could provide to a company like us in terms of sheer numbers.”
The reward for braving a London IPO has also been poor in recent years. Food-delivery platform Deliveroo Plc has sunk nearly 80% since going public in 2021, while Dr Martens Plc, the footwear brand, is down about 58%. Ithaca Energy Plc has already lost about 29% of its market capitalization in the four months since its IPO. In 2022, the UK capital’s share of European IPO proceeds fell to a mere 8% of the region’s total, the lowest since the global financial crisis.
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Another obstacle is the dwindling share of pension funds invested in the domestic market.
“We don’t have these large longer-term domestic investors that are really keen to invest in UK equity so it’s not a big surprise that companies are looking to get the deeper pools of capital elsewhere,” said Sharon Bell, a strategist at Goldman Sachs Group Inc. “You’ve really got to think about how we encourage not just companies to list here, but how to encourage demand to invest in the equity of that company, whether that be households or the big pools of capital,” like pension funds.
Sharp swings in the currency have also acted as a deterrent for investors even as stock valuations remained cheaper than European and US peers. Sterling has been among the more volatile developed market currencies since 2016, data compiled by Bloomberg show.
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After Arm’s decision, David Schwimmer, the London Stock Exchange CEO, called for reforms to listing rules “to make London that much more of a competitive and attractive listing destination and financial center.”
The Brexit Effect
Tentative signs of an improvement in trade relations with Europe have yet to coax investors to increase allocation to British stocks.
Read More: Brexit Deal Puts Disliked UK Assets on Long Road to Recovery
Asset managers including BlackRock Inc. and Abrdn Plc said this week they expect a post-Brexit trade deal on Northern Ireland to remove only some of the uncertainty that has dogged the UK. A February survey from Bank of America Corp. showed the share of global fund managers that are underweight UK stocks was 11%, while 9% of investors said they’re now overweight European equities.
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Not everyone is convinced that London’s influence among global financial markets is diminishing.
“Assets have flowed out of the UK after Brexit,” said Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH. “The important thing, however, is that knowledge and expertise has remained in the City – no brain drain – and the location continues to be favorable for investors.
“Standing in contrast to European over-regulation will support the City in the future,” he added, “although it won’t be an easy journey.”
—With assistance from Julia Fioretti, Sabah Meddings and William Shaw.
