Lifeless London is no longer in palliative care

The last few years have undoubtedly been difficult for London’s markets. The numbers don’t lie and the decline in market activity since 2022 has been brutal.

The markets and the advisor community that depends on them have been hit hard. The response so far has not been an attitude of defiance, a belt of loins backed by years of success as one of the world’s leading trading centers, but rather growing hysteria and a seemingly insatiable appetite forever the same thing.

Stakeholders in London sought a kind of collective therapy through an endless stream of pessimistic reporting, rushing to be the first to declare that the patient, unfortunately, did not survive this time.

Meanwhile, they look with envy at the seemingly limitless opportunities and wealth of America’s prestigious markets. These markets boast exceptional valuations, unlimited liquidity – and the notion of capped fees is non-existent.

As always, the picture is more nuanced.

Valuation is often cited as the most common cause of the need for palliative care in London – and again it is true that London’s FTSE 100 trades at a price-to-earnings multiple close to half that of S&P 500 index, but that’s only a fraction of the story.

The US market is heavily skewed by a few outliers and the sample size is only a fraction of the larger market. If we look at valuations company by company, the valuations in the US and London markets are actually similar.

In reality, the problems London has faced in recent years are just as severe in other major global markets.

If you talk to the executives of listed companies in the United States, Australia or Canada, you will find that – contrary to our beliefs – asking them to share stories of enthusiastic investors lining up to invest at astonishing premiums will not than dazzle them. and their shoulders sag.

They will reluctantly describe the investment struggle as that of a neglected listed company in a highly competitive market – at least until the tension becomes too overwhelming to continue.

It wasn’t always like this. London’s recent dramatic loss of confidence can be attributed to Saudi Aramco’s flirtation with the market between 2016 and 2018. London was so keen to attract its biggest IPO that the rules were rewritten in a brazen and little attempt subtlety of attracting a foreign giant.

Somewhat inevitably, having put much of his self-esteem on the line, Saudi Arabia’s rejection hit hard and, as with so many failed courtships, led to a long and intense period of navel-gazing exacerbated by uncertainty about the functioning of the London markets. in a post-Brexit environment.

The story continues

While we once scoffed at the US markets’ impenetrable legislation, listing hurdles, and near-certainty of being hit with a class-action lawsuit, we seemed to collectively conclude that London simply wasn’t good enough .

As is often the case, there were undoubtedly improvements to be made and work to be done. However, it might not have been as bad as we thought.

Over the past year, with the implementation of long-proposed changes to the city’s regulatory environment and the promise of additional and arguably more consequential changes to come, London may well have the boost that she needs to regain her old swagger.

London is the most active shares market in Europe, with 1.8 times more trades than the next most active exchange. It has access to an incredibly broad and knowledgeable range of institutional and retail investors with almost £500 billion of funds mandated in the UK – while still allowing access to US investors.

It draws on a market and advisor community that is much more supportive of small and mid-caps than any other major market.

As has been widely reported, thanks to a combination of buyouts, mergers and (yes) delistings, London is currently inventory poor (especially in the mid-market sector that is so crowded in the US). Fund managers lament the lack of investment opportunities for companies that will become the next generation of large-cap issuers.

With changes to listing rules making listing in London – particularly for overseas issuers – relatively seamless, with equivalent valuations and capital and investor bases not available in their home markets, there has been a real explosion of interest in foreign companies looking at London. .

At Howard Kennedy, we have received inquiries from companies whose combined market capitalization exceeds £1.2 billion since July, surpassing last year’s fundraising total in just two months.

This provides more than sufficient reason to believe that London is about to experience a real turning point in its attractiveness and – to paraphrase a great American – reports of its demise may be greatly exaggerated.

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