London is accustomed to exceeding expectations in global financial markets.
Due to the international nature of its listed companies, the London Stock Exchange attracted an excessive amount of investor capital in comparison to the size of the UK economy for years.
According to Citigroup, UK-listed stocks made up 11% of the MSCI World Index in 2000, which tracks over 1,500 companies that make up the vast majority of the global stock market by value. According to an article that was published in the Financial Times by the bank’s chief global equity strategist, the UK market now accounts for only 4% of the total.
Big tech IPOs on Wall Street and faster-growing markets in other parts of the world, like China and India, have attracted investors. In the meantime, in an effort to obtain more certain returns on government bonds, pension funds in the United Kingdom have reduced their exposure to local stocks.
Then came Brexit and years of political turmoil that made London less of a financial powerhouse in Europe and hurt Britain’s reputation among investors.
Despite a recent upswing, the FTSE 100 (UKX) has fallen behind gains in benchmark exchanges in the European Union and the United States since the global financial crisis. This is because of the combined effect.
After chipmaker ARM, the UK tech sector’s crown jewel, announced that it would hold its initial public offering (IPO) on Wall Street and building materials supplier CRH (CRH), the world’s largest, announced that it would move its primary listing to the United States, concerns about the future of London resurfaced over the past week. Shell, the largest publicly traded company in London, is also said to have thought about moving. Because London’s markets are so important to the UK economy, there is growing concern.
Michael Hewson, chief market analyst at stockbroker CMC Markets UK, described the company’s actions as “a vote of no confidence in the investment environment here in the UK” when taken as a whole.
London continues to be a significant international financial hub. There are more daily transactions of approximately $3.8 trillion in foreign exchange than in all of New York, Singapore, Hong Kong, and Tokyo combined. Additionally, the London Stock Exchange claims that the city hosts 70% of all secondary bond market transactions worldwide.
London also raised the most money in 2021 through IPOs and follow-on deals, outstripping China and the United States. Furthermore, England stayed the world’s driving exporter of monetary administrations that year
Nevertheless, there is a lot of evidence to suggest that London cannot relax about its future. Europe’s largest stock market is now located in France, where the CAC All-Share Index is worth €3.1 trillion ($3.3 trillion), while London’s FTSE All-Share index is worth £2.4 trillion ($2.9 trillion).
The British headquarters and operations of ARM will continue, and the company, which is owned by Softbank in Japan, stated that it would consider a subsequent UK listing “in due course.”
However, the company’s decision to list in New York clearly reflects a trend. Ferguson (FERGY), a UK-based plumbing hardware provider, moved its essential posting from London to New York last year. In addition to their UK listings, software company WANdisco and online sports betting company Flutter (PDYPF), which owns FanDuel, are looking into US listings as well. Vacillate (PDYPF) said it accepted a US posting would give “admittance to a lot further capital business sectors, and to new US homegrown financial backers.”
The two markets are vastly different in terms of value. According to Citi researchers, the MSCI United Kingdom Index, which tracks 80 of the largest UK-listed companies, now trades at a nearly 40% discount to the US MSCI Index, which tracks 625 companies.
The UK government and regulators have initiated a program of reforms to relaunch UK finance in response to London’s steady decline as a financial center.
The most significant reorganization of Britain’s financial services policy in two decades, they are known as the “Edinburgh Reforms.” They cover banking, asset management, insurance, and capital markets.
In a statement, London Stock Exchange CEO Julia Hoggett said that the ARM decision “demonstrates the need for the UK to make rapid progress in its regulatory and market reform agenda.”
“We are working with controllers, government and more extensive market members to guarantee UK capital business sectors give the most ideal subsidizing climate for UK and worldwide organizations.”
Fighting for its future
The markets in London are very important to the UK economy as a whole.
They play a crucial role in the vast financial services industry in Britain, which, according to PwC, makes up more than 8% of the country’s GDP and generates roughly 10% of the country’s tax revenue. The industry employs over 1 million people, and another 1.2 million people work in related professional services like public relations, law, and auditing.
Financial markets also funnel capital into businesses to fund their future expansion, in addition to the tax revenue they generate and the jobs they create.
The loss of ARM, which was a part of the FTSE 100 before it was bought by Softbank in 2016, suggests that Britain risks losing the best of its homegrown businesses to the United States without a more vibrant stock market. The primary concern is that investments and jobs will inevitably follow listings.
To put it another way, London must reenergize its stock markets in order to safeguard its future.
Alasdair Haynes, CEO of Aquis Exchange, an upstart rival to the London Stock Exchange and the CBOE, stated that the city needs to be seen as the place to be for businesses looking to expand and raise capital.
Haynes stated to CNN, “We are absolutely rubbish when it comes to scale-up capital.” He added, “We are brilliant at start-up capital.”
The most important thing is to change regulations so that smaller businesses can list and the public can invest in them before an IPO. It doesn’t mean settling for the status quo. According to Haynes, this indicates that regulations ought to be proportionate to the size of a company.
There is a lot of potential in London. According to the City of London Corporation, it is home to 100 tech “unicorns,” which are businesses that are worth more than $1 billion. That is more than in the entirety of Europe. Additionally, it is the world’s third-largest fintech hub.
Haynes argues that these “unicorns” should list in London “at an earlier stage” as opposed to growing through private equity and being sold to Nasdaq.
The London Stock Exchange’s Hoggett puts it this way: London must be energetic, young, and hungry.