London is used to punching well above its weight in global financial markets.
For years, the London Stock Exchange attracted an outsized share of investor capital relative to the size of the UK economy, reflecting the international nature of its listed companies.
In 2000, UK-listed equities made up 11% of the MSCI World Index — which tracks more than 1,500 companies that account for the vast majority of the global stock market by value — according to Citigroup. Fast-forward 23 years and the UK market now represents just 4%, the bank’s chief global equity strategist wrote in the Financial Times.
Investors have been drawn to faster-growing markets in other parts of the world, such as China and India, and to big tech IPOs on Wall Street. Meanwhile, UK pensions funds have slashed their exposure to local stocks in the search of more certain returns on government bonds.
Then came Brexit and years of political turmoil that undermined London’s status as the king of European finance, and battered Britain’s standing in the eyes of investors.
The combined effect has weighed heavily on the FTSE 100 (UKX), which, despite a recent hot streak, has trailed the gains in benchmark exchanges in the European Union and the United States since the global financial crisis.
Fears for London’s future resurfaced over the past week after chipmaker ARM, the crown jewel of the UK tech sector, said it would hold its IPO on Wall Street, and CRH (CRH), the world’s largest building materials supplier, said it would moving its primary listing to the United States. Shell, London’s largest listed company, has also reportedly considered relocating. The health of London’s markets is vital to the UK economy, hence the growing sense of alarm.
Taken together, the company moves feel like “a vote of no confidence in the investment environment here in the UK,” said Michael Hewson, chief market analyst at stockbroker CMC Markets UK.
London is still a major international financial center. Some $3.8 trillion of daily foreign exchange trades are transacted there — more than in New York, Singapore, Hong Kong and Tokyo combined. And 70% of global secondary bond market trading happens in the city, according to the London Stock Exchange.
Outside of the United States and China, London also raised the most money, through IPOs and follow-on deals, in 2021. And Britain remained the world’s leading exporter of financial services that year.
Still, there is plenty of evidence that London can’t be complacent about its future. France is now home to Europe’s largest stock market by value — its CAC All-Share Index is worth €3.1 trillion ($3.3 trillion), compared with London’s FTSE All-Share index at £2.4 trillion ($2.9 trillion).
ARM’s headquarters and operations will remain in Britain and the company, owned by Japan’s Softbank, said it intended to consider a subsequent UK listing “in due course.”
But its decision to list in New York is clearly part of a trend. Ferguson (FERGY), a UK-based plumbing equipment supplier, moved its primary listing from London to New York last year. Software group WANdisco and online sports betting company Flutter (PDYPF), which owns FanDuel, are also exploring US listings, in addition to their UK listings. Flutter (PDYPF) said it believed a US listing would provide “access to much deeper capital markets, and to new US domestic investors.”
The value gap between the two markets is stark. The MSCI United Kingdom Index, which tracks 80 of the biggest UK-listed companies, now trades at a nearly 40% discount to the 625-strong US MSCI Index, according to researchers at Citi.
The steady erosion of London’s position as a financial center has prompted the UK government and regulators to embark on a program of reforms designed to reboot UK finance.
Dubbed the “Edinburgh Reforms,” they amount to the most significant overhaul of Britain’s financial services policy in two decades and span banking, asset management, insurance and capital markets.
The ARM decision “demonstrates the need for the UK to make rapid progress in its regulatory and market reform agenda,” London Stock Exchange CEO Julia Hoggett said in a statement.
“We are working with regulators, government and wider market participants to ensure UK capital markets provide the best possible funding environment for UK and global companies.”
Fighting for its future
London’s markets matter a great deal to the wider UK economy.
They are integral to Britain’s sprawling financial services sector, which contributes more than 8% to UK GDP and is the source of roughly 10% of tax revenue, according to PwC.
More than 1 million people work in the industry, with another 1.2 million people employed in related professional services, such as law, auditing and public relations.
Beyond the jobs they create and the tax they generate, financial markets also channel capital into companies to fund future growth.
The loss of ARM — which was a constituent of the FTSE 100 before it was bought by Softbank in 2016 — suggests that without a more vibrant stock market, Britain risks losing the best of its homegrown companies to the United States. The bigger worry is that where listings go, jobs and investment inevitably follow.
In other words, to safeguard its future, London needs to reinvigorate its stock markets.
The city needs to be seen as the place to be for businesses wanting to grow and raise capital, said Alasdair Haynes, the CEO of Aquis Exchange, an upstart rival to the London Stock Exchange and the CBOE.
“We’re brilliant at start-up capital… When it comes to scale-up capital, we are absolutely rubbish,” Haynes told CNN.
The key is to change regulation to make it easier for smaller companies to list and for the public to invest in them ahead of an IPO. “It doesn’t mean lowering standards. It means rules should be proportionate and appropriate for the size of a business,” Haynes said.
London has plenty of potential. It is home to 100 tech “unicorns” — companies valued at more than $1 billion, says the City of London Corporation. That’s more than in the rest of Europe combined. It is also the third biggest fintech hub in the world.
Those “unicorns” should be listing in London “at an earlier stage,” Haynes argues, “rather than growing through private equity and being sold off to Nasdaq.”
Hoggett of the London Stock Exchange puts it this way: “London needs to be young, scrappy and hungry.”