A warning over an exodus of major companies from the London stock market was sounded today as investors pull money out of Britain in search of better returns in the United States.
A huge gap in the value of similar companies in London and New York is putting pressure on chief executives to switch their listing in moves that could be devastating to the capital’s status as a global financial centre.
There is growing talk that a giant such as Shell could quit London, turning stock market strife into a full City crisis. Figures compiled for the Evening Standard show the market for new flotations — companies raising money to join the London Stock Exchange — has collapsed.
⬤ New companies raised £12 billion on the LSE in 2021. That fell to £338 million in 2022 and this year (so far) to just £18.5 million.
⬤ Small investors have pulled £25 billion from the stock market in the last two years.
⬤ Large companies such as Paddy Power owner Flutter are moving their stock listing to New York.
⬤ Pension funds have just four per cent of their portfolio in British shares. This compares to 30 per cent for foreign funds in their own markets.
⬤ Over the last five years the FTSE 100 is up just seven per cent. The Dow Jones is up 54 per cent over the same period
Since the start of 2014, 68 initial public offerings (IPOs) — or stock launches — by British companies worth $21 billion have been priced away from London, according to Mergermarket data.
In 2021, 24 IPOs from UK issuers worth $6.5 billion (£5.13 billion) were priced abroad and last year the largest UK issuer listing was Arm’s $5.2 billion (£4.11 billion) Nasdaq IPO. Over the same period since 2014, 137 companies worth $148 billion (£117 billion) have been taken off the London stock market by private buyers.
Lucinda Guthrie, head of Mergermarket at ION Analytics, said: “The UK is having a bit of an identity crisis. IPOs on the LSE have dwindled in the past few years with some large businesses, notably Arm, choosing a US-listing over home equity markets, showing doubts about equity market liquidity.
“Brexit has made matters worse and companies with a large EU presence are opting to look at European exchanges over the UK — CVC being a particular example with its reported IPO destination of Amsterdam, despite London seeming a more natural home.”
With investors large and small yanking money out of British shares, the value of the companies that have stuck with London have been moribund for years.
Even big companies such as British American Tobacco that have said they are committed to London are under pressure from investors to move to New York, where comparable companies have much higher valuations.
Some blame Brexit, while others note that the insurance, bond markets and other parts of the City have now dealt with our departure from the EU.
James Ashton, of the Quoted Companies Simon English Alliance, said: “Public companies are more mobile than ever which is why there is so much focus on reforming London’s capital markets so that they work for stocks of all sizes.
“As well as ensuring the City can compete toe-to-toe with New York or Amsterdam, a big concern is that growth stocks can access the liquidity they need — and that the cost of floating and remaining quoted does not exceed the benefit.”
Brokers AJ Bell suggest five companies with a combined valued of £230 billion that could be next to quit London, since they have large US arms. They are Shell, Pearson, National Grid, Diploma and Bunzl.
Fund manager Terry Smith, one of the most successful investors, owns few London shares in his £35 billion Fundsmith vehicle and regards much of the UK stock market as “uninvestable”.
He told the Standard: “Fundsmith doesn’t invest in many UK companies because there aren’t many that satisfy our quality criteria. In contrast Microsoft has a larger market capitalisation than the whole of the FTSE.”
Last week Unilever said it would spin off its £15 billion ice-cream business, a float London would love to land, though that seems highly unlikely. Alan Miller of SCM Direct said: “The chance of Unilever listing the ice-cream business in the UK is the same as winning the lottery in rollover week.”
Miller warns that UK shares could be in a “death spiral” that is a drain on businesses. He said: “A very concerning trend has emerged in the financial landscape. One that threatens the very foundations of British business — a significant and steady decline in domestic investment in UK equities.”
This trend, highlighted by a report from the Office for National Statistics, reveals that the combined ownership of UK-quoted equities by insurance and pension funds has dramatically fallen from 45.7 per cent in 1997 to just 4.2 per cent in 2022, marking the lowest level ever recorded.
This shift poses a grave risk to the UK economy’s stability. International investors say there is little encouragement to buy UK shares, since British investors won’t. Critics say the problem is the London Stock Exchange Group itself, a giant data business that sells investment information across the globe.
The stock market is only five per cent of its revenues. Chief executive David Schwimmer, an American and former Goldman Sachs man, says the London market is important to the business and decries pessimism about its own prospects.
He has said there is “an overplayed narrative and anything that is seen as negative commentary about London as a financial centre has become kind of clickbait”. The head of the company that owns the New York stock exchange said investors find it difficult to put their cash in UK businesses.
Jeffrey Sprecher said: “They still seem to be getting their arms around Brexit. So it’s hard to make investment decisions for us in either London or continental Europe.”
Alasdair Haynes of Aquis Exchange said: “These are difficult times for markets. We don’t have proper competition and stamp duty means the wrong people are paying tax. “In the US, there is huge competition between the Nasdaq and the NYSE. We have a government that believes in a monopoly — the London Stock Exchange, and international investors, do not invest in the UK due to political shenanigans. We need stability.”
