Education, skills, demand for labour – a range of factors determine how much any of us are worth. But the single biggest factor is geography. A car wash manager in the US can earn more than the head of cyber security at HM Treasury in London, who in turn makes more than an even higher-skilled worker stuck in a low-wage economy.
A similar phenomenon is going on with UK equities. As our Financial Editor Simon English reports, Britain’s top 100 companies would be worth nearly £500bn more if they did nothing other than shift their stock listing to New York.
This sounds a bit like those ‘one weird trick to lose weight’ adverts you see all over the internet, and of course the FTSE’s top 100 companies are not all about to jump ship. But it makes for a heck of a thought experiment. And this gap is fuelling fears that London’s stock market – which Simon calls the formerly premier equity index in the world – is in danger of becoming a backwater.
The numbers are based on a few assumptions but the maths itself is pretty simple. The FTSE 100 market value is roughly £2.55 trillion. Based on its combined profits and earnings, it would be £460 billion higher were US share values applied. That is because of a gulf in valuations to earnings between the two.
Figures compiled by Alan Miller, a fund manager at SCM Direct, show that 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.
Take oil and gas, which dominates the FTSE 100. Miller points out that BP and Shell have an average price-to-earnings ratio of 6.5x, while Exxon Mobil and Chevron stand on 11.5x and 11.6x of earnings, respectively. But it’s not all about Brexit. Other European nations with the foresight not to leave the world’s largest free trading bloc are also encountering similar problems.
This London discount in part explains why there have been so few new stock market flotations in the capital this year. Figures from earlier this week recorded just five in 2023, raising just £81m. Most notable was when British chip designer ARM chose to list in New York rather than London, a decision the Wall Street Journal said underscored “the magnetic pull of the U.S. for big business and the diminished profile of the U.K. as a global financial capital.”
Part of the problem is that UK pension funds hold only 5-6 per cent in UK equities, a figure that has fallen dramatically over the last few decades. This has been driven by a number of factors, not least regulations which encourage pension funds to purchase bonds rather than shares. The government has long been aware of this issue and measures are expected at the Autumn Statement but, as Simon reports, there are fears this may be insufficient.
If our pension funds don’t buy shares in Britain’s biggest companies, the risk is that it will one day be too late – either because they’ve all been bought up on the cheap by private equity, or they’ve simply moved to New York.
Elsewhere in the paper, Anne McElvoy reports from inside the internecine battle between Rishi Sunak and Keir Starmer, following the fallout from *that* attack ad.
In the comment pages, Paul Flynn says one way to honour Grenfell victims is to show Steve McQueen’s chilling but essential new film forever. Melanie McDonagh calls Mary Quant a genius who brought fashion to the people like no one else. While Robbie Smith comes out firmly against rewilding if it means being killed by a bear.
And finally, from pop-up restaurants and drinking dens to a classic car boot sale Kings Cross, what to do in London this weekend.
Have a good one.
