Shortly before 8am on Tuesday, about a dozen leading bankers descended on No. 11 Downing Street to solve a pressing problem.
The London stock market, a symbol of Britain's position in the world, is rapidly losing its status as a global center for attracting new capital.
Companies that once flocked to Heathrow to tap London's huge cash flows are gradually fleeing to the US or into the arms of private equity buyers. Even those who are already listed here are starting to run away.
The London stock market has just had its quietest year since 2010, according to EY, while investors continue to pull billions out of UK equity funds.
Apple is now worth £2.3 trillion more than everyone else British shares. market.
Alarmed by the fall, Chancellor Jeremy Hunt has sought to bolster London's prestige with a package of reforms designed to attract more money into British shares.
In 2023, only 23 companies entered the market. Listed companies performed poorly.
Shares of fintech company CAB Payments have fallen 70% since their debut. Arm's decision to list on the Nasdaq rather than the LSE was also a blow to confidence, and more companies have since flouted the market.
Glencore, a long-standing FTSE 100 company, recently decided to list its coal spin-off company in New York and the IPO of the British trading house Marex is taking place in the USA. Companies are in the process of leaving London or moving their main listing overseas.
Building materials company CRH, betting group Flutter Entertainment, travel agent TUI and packaging supplier Smurfit Kappa are either moving into wholesale trading or pursuing secondary listings elsewhere.
As a result, the stock market has contracted significantly. The number of UK-listed shares has fallen by 20% since 2017, as a result of acquisitions and exits, according to Peel Hunt.
The number of companies on the junior stock market and the FTSE Smallcap index has halved. last year's figures.
“Brexit highlighted the fact that part of London's busyness—London's centrality as a financial center—was driven by our position in Europe,” says James Wootton, global co-head of equity capital markets at Magic. Law firm Circle Linklaters.
“If you decide to list in Europe, to some extent you might as well list in London as the location in Europe with the deepest pools of capital and the greatest liquidity.
“Once London comes out of this and you become a third-party competitor, we will be competing with both Europe and the US.”
Before Brexit, when markets were supported by the Scottish referendum vote and the fiscal coalition government policies, UK shares were highly valued. They traded at a premium to global equities.
But as investors increasingly shunned the UK market after Brexit, that premium disappeared.
More sellers than buyers sent share prices tumbling. over the past few years.
Less-loved UK equity funds experienced their 31st month of net selling in December and their third straight year of net outflows, according to Calastone.
Simon French, chief economist at Panmure Gordon, says Brexit was the catalyst that triggered the fall in UK share prices.
«The 2017-2019 debacle gave investors an excuse to under-allocate because they didn't know what was going to happen,» he says.
British shares have underperformed their international peers since Brexit, according to Panmure Gordon, and the spread is now at a three-decade low of 19%. The Bank of America fund manager survey, which asks investors about their views on various markets, consistently shows that money managers are at best apathetic towards Britain.
Pension pains
While Brexit is often blamed for the dying London market, many also point to long-standing problems with the British stock market that date back decades.
I'm not sure it was because of Brexit, says Martin Gilbert , former chief executive of FTSE 100 asset manager Aberdeen Asset Management.
“The biggest structural and systemic changes to pension fund portfolios have had an effect. It's just a cycle and has nothing to do with Brexit.»
Pension funds used to be some of the largest investors in the UK stock market, but following the Robert Maxwell scandal at the Mirror Group pension scheme, increased regulation has prompted them to make investing even safer.
British pension funds and insurers used to own about 44% of the UK stock market two decades ago, but now own just 4%, according to Peel Hunt. The intense focus on risk management has effectively driven the UK's huge pool of pension and insurance capital out of the London stock market.
“This is not a Brexit issue,” says Citi UK chief executive Tiina Lee. “This has been happening for the last 25 years.
“There was a process in the UK where risk minimization really took hold, and 25 years later there was a massive withdrawal from the market.”
Rolet says trends toward a thinner stock market have already been seen. on a pre-Brexit trip and as a result of policy decisions made by the UK government over the years.
“The UK has a regulatory framework that prohibits pension funds and insurance companies from holding significant amounts of shares. Unless this rule is lifted, British stock markets will not be able to recover.
“Brexit has made the pain much worse, but before then the conditions were set for the downturn in UK and EU markets to worsen.”
City minister Bim Afolami MP says stock market problems reflect global problems.
City minister Bim Afolami MP says stock market problems reflect global problems.
City minister Bim Afolami MP says stock market problems reflect global problems. p>
“There were difficulties with the capital markets, but this is typical for all European countries,” he says. “This situation is observed in most countries, including the United States, but to a much lesser extent in the United States. For a variety of structural reasons, there has been a global shift towards private capital.»
Global pressures
Analysts are also quick to argue that the drought in London listings is a result of the wider global economic downturn, which is proving to be a drag on deal-making.
The number of listings worldwide fell by 8 last year, according to an EY report. %.
“We have seen the IPO market close down around the world as external events have taken place — the war in Ukraine, high inflation, high interest rates,” says Scott McCubbin, EY UK and Ireland IPO team leader.
The London stock market also had to compete with the rise of private capital, fueled by an era of rock-bottom borrowing costs and low inflation.
The abundance of private equity, venture capital and sovereign wealth soared. Aspiring entrepreneurs are lured away from public markets by the prospect of greater control over their businesses, higher salaries, and the freedom to operate outside the public eye.
An old industry struggling to compete
Another explanation for this malaise lies in the structure of the British stock market. While big tech companies have powered the US stock market's stellar performance (Amazon, Apple and Tesla are among the «Magnificent Seven» stocks that have seen huge gains this year), UK blue-chip companies have suffered repeated setbacks.< /p>
“Talking to older industry companies, which in some cases faced very serious structural problems, has become a challenge for the UK market,” says Ben Ritchie, head of developed equities Abrdn investment fund markets.
Energy and mining giants represented in the London commodities index have faced a reckoning over their post-pandemic focus on ESG, while banks have been saddled with EU bureaucratic red tape and, until recently, low interest rates. Ritchie says: “Investor focus on sustainability has probably also had a negative impact on the UK market.”
“If you think about the big elements of exposure to oil, mining and tobacco — these are all areas of the UK market where investors are likely to find it increasingly difficult to invest in these sectors given sustainability demands from their clients.»
Meanwhile, a number of high-performing luxury consumer groups in France, such as LVMH, allowed Paris to briefly seize London's crown as Europe's biggest stock market in 2022 as the ultra-wealthy endured a cost of living slump.
< p>UK attitude to mergers and Laissez-faire takeovers relative to more patronizing rivals on the block have also made it easy for private equity firms to pick out rising stars and undervalued minnows.
“We were happier to see smaller sizes. and mid-sized companies took over, which probably meant that some of the businesses that could have grown into UK-listed global champions simply never had the opportunity because they were acquired much earlier in the process.» — says Richie.
The average UK takeover premium rose to 51% last year, up from 37% in 2022, according to AJ Bell. While it may appear that UK investors are getting a good deal, it shows just how undervalued UK companies are.
EQT, a Swedish private equity firm, has joined last year's bargain hunters with its purchase of UK veterinary drugs maker Dechra Pharmaceuticals. for £4.6 billion, which is 44% higher than its share price at closing before the buyout was announced.
The Northwich-based company has since been upgraded to the FTSE 100, marking a brief return to the blue chip category. index before the deal is completed this year.
Rescue plan
After years of taking the UK's much-loved stock market for granted, politicians are now desperate to save the City's fortunes.
The Financial Conduct Authority last month outlined detailed proposals to streamline London's listing regime, including a new category designed to make secondary listings more attractive. Hunt's Edinburgh reforms and other measures were also seen as a panacea for the London stock market's difficulties.
Afolami says: “Brexit has given us an opportunity to sort out some of the rifts that have arisen in our system.”
Jeremy Hunt's Edinburgh reforms aim to revive the market by encouraging pension funds back into UK shares. Photo: Aaron Chown/PA
“We are pursuing legal and regulatory reform, accompanied by a change in cultural thinking and market practice, to ensure greater investment in UK businesses, greater wealth for ordinary retail investors and a larger economy.”
The reforms have been welcomed by the industry, which believes it is a step in the right direction. Citi's Lee says: «If we want to attract and retain growing companies in the UK, we need to get the domestic demand right.» But she adds: “You can't fix this in a year.”
Charles Hall, head of research at Peel Hunt, said last month: “The traditional view is that stock markets are just allowed to deal with this, and they just reflect what is happening in other places.”
“This opinion is becoming more and more common. the opinion that you need to develop your stock market. We operate in a global capital market, and if we don't develop our equity market, it will end up somewhere else.» The so-called British ISA is an example of one of the initiatives underway aimed at encouraging the purchase of UK shares.
We hope that by making buying UK shares more attractive to ordinary investors, it will help raise prices, increase demand and create a favorable a cycle that will return London to the top.
Prime Minister Rishi Sunak, who previously worked at Goldman Sachs and hedge fund TCI, has done his best to give impetus to the proposals. Earlier this year, he hired former Morgan Stanley banker Frank Petitgas, who attended Tuesday's meeting, as a business and investment adviser.
French Petitgas worked at the Wall Street bank for more than three decades, giving him credibility in the world of global finance.
The London Stock Exchange itself is also stepping up efforts to improve its position, with chief executive Julia Hoggett constantly working in the City, beating the drum for the benefits of a UK listing. Although the number of listings has fallen, total capital raised in London, including new listings and funds from existing companies, grew by 30% last year.
“The London Stock Exchange remains Europe's leading capital raising platform by almost any standard, it has been that way for decades and remains so today,” she says.
“Markets around the world have been depressed due to a number of factors over the last couple of years, including rising interest rates, inflation and geopolitical uncertainty.”
More at stake
The London Stock Exchange is the poster child for British financial markets and barometer for success or not.
However, there is another industry affected by Brexit that faces more serious problems. Interest rate swaps are the largest financial asset in the world, and London has been a regional center for their trading for decades.
But London could lose its important role as Brussels fights for control of the lucrative market. The UK will lose the right to conduct euro-denominated swaps from June 2025, and EU officials are seeking to repatriate the €735 trillion market.
The US has been offered special status that would allow euro-denominated swaps. executed in America, which means European swaps could move to New York.
The loss of such an important market due to Brexit could be much more damaging to the UK than to the stock market, says Rolet. “There's all this attention on equities because they're symbolic, but they're microscopic compared to interest rate swaps,” he says.
“The G20 mostly clears in London. That's a quadrillion dollars per year of notional risk. It's a big prize, and the big winners could be US investment banks.»
Afolami says the government is «ready to work» with the EU to ensure clearing is «reasonably regulated and monitored.»< /p>< p>“Equivalence is a unilateral decision by the EU. It is a global norm to allow market infrastructure from other jurisdictions and not to do so would be a drag on the global financial system.”
Negotiations between Afola and his EU counterparts are ongoing, but Brussels has not yet signaled what it is willing to do This. provide equivalence.
When bankers left the Treasury on Tuesday, there was optimism in the air. For London's sake it should work.
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