Examining the LSExodus | USAEMALL.com

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

You’re probably aware of the UK’s near-existential angst over the decline of its stock market, encapsulated by the number of companies shifting their listings from London to the US in recent years.

MainFT’s Rafe Uddin, Marianna Giusti and Ian Smith wrote a cracking piece on it over the weekend, with some stark numbers and arresting data viz on another year of woe for the UK’s stock market.

The London Stock Exchange is on course for its worst year for departures since the financial crisis, as fears mount that more FTSE 100 businesses will quit the UK in favour of New York.

A total of 88 companies have delisted or transferred their primary listing from London’s main market this year with only 18 taking their place, according to the London Stock Exchange Group.

This marks the biggest net outflow of companies from the main market since 2009, while the number of new listings is also on course to be the lowest in 15 years as initial public offerings remain scarce and bidders target London-listed groups.

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Goldman Sachs has also been taking a look at the phenomenon. On Friday the investment bank’s equity analysts published a chart-tastic report titled “New York Calling” examining the UK’s stock market malaise and the LSExodus

It pointed out that the shifting of listings to the US is largely driven by a growing valuation gap. This is a global issue (US stocks batter pretty much everything else) but particularly acute for the UK, even if you adjust for different sectoral makeups.

Here’s a chart showing the 12-month forward price-to-earnings ratio of the UK stock market versus the American one. This is pretty wild, with the UK actually trading at a slight premium once you factor in sectoral differences as recently as 2016 (what happened in 2016 again?)

Here are some of Goldman’s main observations:

More UK companies are talking about moving their listing to the US (Ashtead is the latest to propose a move). The valuation gap to the US has become larger. And only a small proportion of this is due to sector distribution; every sector in the UK is on a double-digit P/E discount to its US counterpart sector. This discount is of course a Europe-wide phenomenon, but the gap between the UK and US is especially large.

US companies are far more profitable, but even relative to ROE, the UK market trades at a low multiple vis-à-vis other markets; the UK has roughly twice the ROE of Japan but a similar Price-to-Book.

A lack of allocation to UK equities by long-term domestic capital (pensions/insurance funds) and by households is a large reason for the discount, we think. Only about one-third of the UK equity market is held domestically, compared with over 80% in the mid-1990s.

Assuming we do not see fund flows into UK stocks, there are only so many ways to try to narrow the valuation gap to the US — relist, take-private (where valuation gaps are lower), be taken over or do more buybacks (if you think your shares are under-valued). We are seeing all of these happen. Indeed, UK equity supply is shrinking both via a lack of IPOs and a rise in buybacks/take-privates. We expect all four strategies to continue. But, of course, these create their own momentum, shrinking the UK market further and reducing total trading turnover.

Goldman has made the whole report public for Alphaville readers, and you can find it here. There are lots and lots of charts on various aspects of the phenomenon for you to enjoy (or “enjoy” if you are British).

Should we care though?

Unless you work at the LSE or a small UK stockbroker then no. Who else should care where a stock market listing happens to be? What really matters is where a company is based, does its business and employs people.

The number of listed companies (or even their performance) just doesn’t mean a lot to a country’s economic vim. China added the equivalent of almost four UKs in economic terms in the 2010s, but its stock market has done even worse over that period.

And even if you work at the LSE the importance is pretty limited these days. In the first three quarters of 2024 the company’s equities business only generated £180mn, less than 4 per cent of the LSE’s gross profits over the period. In fact, fixed income and fixed-income derivatives are more than five times as important to the LSE.

The reality is that the City of London’s fortunes have NEVER been reliant on being an equity capital markets centre. Both its 19th century heyday and its late 20th century renaissance were built on becoming the global hub for bonds, not stocks. 

Yes, you can worry about the listing exodus as a symptom of an underlying UK malaise. But the UK should focus on treating the underlying ailment, not the symptom.

Forcing UK pension plans to invest more money into UK equities, for example, is silly. This isn’t a “market failure”. Any self-respecting fiduciary should diversify away from smaller home markets, and if other pension systems have not gone as far as the UK’s then that’s on them.

If the UK stock market starts performing well again, then money will return. Just look at Japan for an example of a stock market that languished for decades, rediscovered its vim and is now attracting investor interest again.