Britain’s top 100 companies would be worth towards £500 billion more if they moved their stock market listings to New York, shock analysis for the Evening Standard shows.
Amidst growing fears that the London stock market, once the premier equity index in the world, is in danger of becoming a backwater for equities, research shows the gap in valuations is worse than previously realised.
More and more large businesses are threatening to move their share listing away from London in frustration at the low value given to their shares.
The FTSE 100 market value is today about £2.55 trillion. Based on its combined profits and earnings, it would be £460 billion higher were US share values applied.
The world of investment did not take the UK’s decision to leave the EU too kindly. In fact ever since June 2016 confidence in the UK as a country to invest in has slowly dissipated.
Alan Miller of SCM Direct, who compiled the figures, says Brexit and a focus on ESG (environmental, social and governance) issues have made investors wary of UK shares.
He said: “The world of investment did not take the UK’s decision to leave the EU too kindly, with confidence in the UK as a country to invest in slowly dissipating since June 2016.
“However, the real gulf in valuations is between the US and UK. In the last seven years, the average US company coming to market is valued over a 3-year period at 25x earnings. In the UK it is only roughly 15x earnings.
“UK companies on a like for like basis are valued 18% less than their Us counterparts. This anomaly ventures to suggest that if the UK companies were quoted in New York their valuation would probably be £460 billion higher than it currently is. No wonder investors have become wary.”
These low valuations leave top UK companies vulnerable to bids from private equity. In February Canaccord Genuity drew up a list of 20 top UK companies at risk, including Hikma Pharma, Computacenter, Playtech and RWS.
Last night Dechra Pharma said it is in talks over a £4.6 billion bid from EQT, a Swedish private equity house.
There are growing calls for the government to act to prevent an exodus of companies away from the City. In particular, pension funds, which are encouraged by regulators to buy bonds rather than shares, should be set free, say many.
Miller adds: “The Government must pull the led out to encourage reluctant visitors back into the fold. London must offer attractive regulatory requirements and taxation benefits as soon as possible.”
Alasdair Haynes of Acquis Exchange said: "This is a startling gap in valuations between the US and London and a worrying sign. Regulations need to change. I have been calling for a radical overhaul of stock exchange rules and I hope that the FCA and the government will address these issues with a sense of urgency.”
Miller’s detailed analysis, which can be read below, applies across most sectors. Even the UK’s unloved banking sector would be valued around 25% higher if they were listed in America.
Figures earlier this week showed there have been just five new stock market floats in London this year, raising a paltry £81 million. That is thin gruel for the brokers who rely on deals to stay in business. Job cuts across the City are beginning to cut deep.
The government is planning a series of measures in the Autumn statement to bolster City competitiveness, but there are fears this may be too-little-too late.
How much does it cost companies to be quoted in the UK?
Alan Miller, CIO of SCM Direct.com
For our analysis, we looked at the FTSE 100 and compared most stocks in the various sectors against comparable stocks in the US and Europe. For example, in the UK the largest sector is ‘integrated oil & gas’ made up by BP and Shell. These titans account for more than 13% of the FTSE 100 and their average Price to Earnings Ratio (P/E) is a lowly 6.5x. This compares to a multiple 28% higher in the US with Exxon Mobil and Chevron standing on 11.5x and 11.6x of their earnings, respectively.
Similarly, UK banks which account for 10% of the FTSE 100 are valued on 5.8x earnings but in the US (even after the demise of SVB and Signature) their banks are typically valued 23% higher. Many of the sectors which the US rated much more highly than the UK were found to be the ‘bad’ poor ESG sectors e.g., Metals & Mining (58% more in the US), Tobacco (44% more in the US), Construction materials (40% more in the US), oil & gas (28% more in the US).
It could be that part of these differences is down to ESG investing being more prevalent in Europe than the US. According to a report by the United Nations Environment Programme Finance Initiative, Europe accounts for 60% of global ESG assets, while the US accounts for 26%.
This might help explain why the analysis showed that on a like for like basis, the UK stocks were valued marginally higher than their European peers (by 3%) but were valued 18% less than their US peers. Despite the consensus that UK stocks were valued lower than European stocks down to Brexit and other factors, this does not seem to be shown by the analysis. It seems more to do with the make-up of the UK having more in unloved assets and more in sectors that tend not to be favoured by ESG funds which are more and more prevalent in Europe.
For example, the broad sector of technology accounts for 7% of the FTSE 100 as compared to over 15% in the European STOXX 50 index and nearly 28% in the US. It may well be that the clammer for companies in the UK to list in the US e.g., ARM is doing this at close to the peak of US valuations.
Whilst there have been several IPOs in the UK stock market, these have tended to be quite small. According to data from Dealogic, there have been 135 new IPOs in the UK over the last 12 months, raising a total of £18.5 billion. This compares to 435 IPOs in the US, raising a total of $170 billion, and 163 IPOs in Europe, raising a total of €100 billion. Not all the recent US IPO’s have been a rip-roaring success – for example the UK online motor dealer, Cazoo started trading on the prestigious New York Stock Exchange in August 2021 – since this date it has fallen by nearly 99%!
One of the signals used by the legendary investor, Warren Buffett to indicate whether the US market is under or over-valued is the market capitalization-to-GDP ratio, which is a measure of the total value of all stocks in a country divided by the country’s GDP. The combined value of UK listed stocks was 91.7 % of its Nominal GDP in Dec 2022, compared with 145.7% in the US suggesting that suggests that US stocks are overvalued. As recently as 2011, the ratio was higher in the UK than the US.
As the analysis shows, part of this is down to the much greater domination of tech stocks in the US but even when one looks beyond tech the rest of corporate America looks about 20% over-valued.
The biggest stock in America is currently Apple. Even though naturally as it gets larger and larger it is harder to generate the same growth, its valuation has managed to grow even further upwards with its P/E ratio approaching 28x. This is nearly 50% more than its average over the last 10 years whilst the global smartphone market is projected to grow by just 2.3% per annum over the next few years and Apple’s market share is forecast to decline from 20% to 16% from 2023 to 2026.
Maybe companies following the hype to float in the US should consider extolling their virtues better to UK and European investors after all before jumping across the pond.
