Why Companies are Fleeing London’s Stock Market in Exchange for New York

The London Stock Exchange (LSE) is one of the world’s oldest stock exchanges and its history can be traced back to the coffee houses of 17th-century London. Fast forward four centuries and London is now a major global financial centre that boasts the most internationally diverse of all stock exchanges, hosting more than 1,000 companies from 60 countries globally, to a total value of £2.4tn.

For years, the LSE attracted an outsized share of investor capital relative to the size of the UK economy. 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. However, 23 years on, the UK market now represents just 4%. 

More UK companies are drawing up plans to shift their stock market listings from the UK to the US, motivated by a larger and deeper market, higher valuations, and the prospect of a government willing to spend hundreds of billions of dollars on infrastructure. This growing exodus threatens to undermine London’s effort to reinvent itself as a vibrant hub for global equities, with the Government looking to safeguard the future of Britain’s sprawling financial services sector, which contributes more than 8% to gross domestic product (GDP).

Fears for London’s future resurfaced after chipmaker Arm, the crown jewel of the UK tech sector, said it would hold its IPO on Wall Street, and CRH, the world’s largest building materials supplier, said it would move its primary listing to the United States. Shell, London’s largest listed company, has also reportedly considered relocating. The string of departures and prospective moves from London underlines the UK’s difficulty in attracting and retaining companies, despite the British Government’s attempts to reinvigorate the city and lure businesses away from rival exchanges.

A key contributor to these decisions to move is the stark and growing valuation gap between the two markets. The MSCI United Kingdom Index, which tracks 80 of the biggest UK-listed companies, now trades at a near 40% discount to the 625-strong US MSCI Index. The continuous long-term selling trend of UK stocks is contributing to this trend where, last year alone, UK investors removed £8.9bn from IA UK All Companies funds alone, with the sector not experiencing a month of positive net inflows since July 2021. When compared to the overflowing markets of the US that can offer a stronger investor pool, a stronger comparative group and give the business not only a higher business valuation but also access to deeper financial markets and support, it’s hard to imagine that the decision for executives to move to a US listing is difficult.

One of the key contributors to this valuation gap is the lack of interest from domestic equity investors in their home market, with investors either drawn to faster-growing markets elsewhere or in search of more certain returns on government bonds. UK investors are generally considered more risk-averse and overly dependent on dividends for returns, resulting in them being comfortable with the traditional sectors, such as mining and energy, which dominate London’s indices. However, dividends can lead to underinvestment and can subsequently hamper the UK’s ability to retain and grow newer companies in sectors such as technology.

In particular, pension funds have, in recent years, increasingly shunned British stocks for lower-risk assets. Holdings of UK-listed companies by British pension and insurance funds have plunged by 90% in the past two decades, channelling a staggering £1.7tn invested in defined benefit schemes into safer fixed-income assets. This shift in asset allocation was partly driven by a change in accounting practises in 2000 which promoted liability-driven investing (LDI) strategies, which aimed to offset big swings in their liabilities and largely eschewed equities. Following this, UK pension fund holdings of fixed-income assets surged from 17% in 2000 to 72% in 2022.

However, these LDI strategies blew up in the aftermath of the UK’s ‘mini-Budget’ last autumn, as the sharp rise in interest rates in September forced pension funds to sell assets, often at significant losses, to meet the liquidity calls required by the fall in LDI values. It is widely viewed as a priority for the Government to review this policy, with a reform allowing the UK’s existing £4tn pension system to return to the UK equity markets and help close the valuation gap with New York.

The steady erosion of London’s attractiveness to companies and investors is a central part of recent attempts by the Government to reinvigorate the City of London, through the “Edinburgh Reforms” that aim to rip up EU rules to make it competitive against rival financial centres. This includes plans for the Government to revamp company prospectuses, reconsider short-selling rules and review investment research material. This program of reforms will amount to the most significant overhaul of Britain’s financial services policy in a generation and will cover banking, asset management, insurance, and financial markets.

London is used to punching well above its weight in global financial markets and, if the Government wants this to continue, the City will need to prioritise reinvigorating the London stock markets. The UK is bursting with creativity and enterprise and is a great place to start a business, but the challenge is for the City to ensure that high-growth companies do not feel that they need to leave our shores in order to grow.

This article was taken from the March 2023 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.

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