Is the London Stock Exchange toxic?
The UK is a powerful country. Placed fifth in the world in terms of GDP, it recorded £2.23trn in 2022 and with more than 30 million adults in the labour market, it boasts the second-largest talent pool in all of Europe. However, it also has an Index losing out to its US counterparts and an inadequate tech climate for VCs and investment.
Numerous British companies seek to delist from the London Stock Exchange (LSE) in a further blow to the Prime Minister’s hopes to set London up as a global financial centre. With outstanding universities, exceptional talent, and incomparable research, the UK has a lot to offer young businesses looking to scale. Why then, do companies leave and list elsewhere?
There is little growth in the FTSE100. In offerings Stateside, the top companies are technology, innovation, and consumer goods. Meanwhile, the FTSE companies look outdated and obsolete.
David Newns, one of the UK’s most successful serial entrepreneurs and investors, reveals the danger of disruption.
He says: “If you look at the S&P 500, eight out of the top 10 companies are founder-led (or were until fairly recently), built by Elon Musk, Mark Zuckerberg, and Jeff Bezos. They’re modern, game-changing businesses too: Apple, Tesla, Meta, Nvidia, and Alphabet. Compare that to the FTSE, none of the top ten companies are innovative, and they’re dominated by old economy businesses; literally half of them are mining and tobacco firms, led by career CEOs. They’re massively at risk from disruption by bright entrepreneurs whose companies are likely to come from outside the UK.”
SoftBank halted plans to explore a London listing of the Cambridge-based chip designer Arm, because of the political upheaval in the UK Government.
Rene Haas, CEO of Arm confirms; “After engagement with the British Government and the FCA over several months, SoftBank and Arm have determined that pursuing a US-only listing of Arm in 2023 is the best path forward for the company and its stakeholders.”
Gambling group Flutter and Shell are also considering a move Stateside. It’s not hard to see why. There is no incentive to list in the UK if the main target market is the US.
A losing streak
This follows building materials giant CRH transferring its main share listing from the UK to the US, battering an already weakened FTSE. The firm said North America accounted for three-quarters of its earnings and was “a key driver of future growth”. CRH said the move provides “higher profitability, returns, and cash” for shareholders.
Shares in Associated British Foods were trading down nearly 6% in London after the company reported a 3% fall in its first-half profit, coinciding with plans to ramp up its US expansion. Fellow retailer JD Sports Fashion’s share price is also sliding.
Why is the FTSE such an underperformer?
Is it because the UK left the EU? Or because of a spate of bad decisions? Maybe because UK lending isn’t as liberal as it is in the US? Or is it because the UK doesn’t back itself enough? It’s likely to be all of this and more, including the burnout driven by Covid-19, market dynamics, and a recognition that sometimes the grass is actually greener on the other side.
David Belle, Founder at Macrodesiac, thinks the toxicity of the FTSE says less about the FTSE and more about the US.
“We could be here for hours talking about why the LSE doesn’t have as great a market cap as the US, but at the end of the day, it’s because people are willing to write big cheques in the US in the VC space with the business model being that many will fail but a few will lead to unicorn status. Here we are far more conservative – but the biggest issue is the US takes all the decent talent! What we need is for our Britishism to take a backseat and to follow our US counterparts a little.”
The UK market presents a paradoxical picture. On the one hand, the market is one of the most mature in the world. On the other, many unicorns are leaving the UK, blaming the state of the financial market. The recent events with THG hints at how the LSE is damaging UK businesses. Chief Executive and Founder Matthew Moulding insinuated that there is a predetermined motivation to talk down UK-listed companies.
“The purpose of the game is simple, to bet that a share price will fall, and make sure you win the bet by doing everything possible to discredit the company,” he claims in a LinkedIn post.
Accusations of (purposeful) mismanaging of UK-listed firms are increasingly commonplace. According to the Tulchan Stewardship Report, 30 years ago pension funds held 55-60% of UK equities. Today it’s 2%. You do the maths.
Eyes on the prize
UK-listed companies have had their heads turned. Why? They have issued 75 profit warnings between January and March this year, the highest first quarter total since the early stages of the pandemic in 2020, according to the EY-Parthenon’s latest Profit Warnings report. As several large companies desert London, the Index is in the spotlight for all the wrong reasons. Out-dated blue-chip stocks deliver good dividend returns and steady growth, but in the current market, it doesn’t compete with other large-cap indexes.
A recent study by EY could point to another reason for the exodus. The study revealed the lack of credible transition plans towards sustainability among FTSE 100 companies. According to the research, only a handful of companies have set out a clear roadmap to achieve their sustainability goals. Considering the growing importance of ESG factors for investors, this is not a good sign.
Home or abroad?
Recently, there have been many high-profile examples of businesses choosing to go public off their home turf. Also, secondary listings are increasing. This should come as no surprise – the US stock market has generally outperformed the UK for decades now.
The FTSE 100 market value is approximately £2.55trn. Taking united profits and earnings into account, it would be worth £460bn more were US share values used. There are 460 billion reasons to choose the US right there. This is a shocking gap in valuations between the US and the UK.
Ashley Ramrachia, Co-Founder and CEO at Academy reflects on why companies are packing up and going overseas:
“Businesses that list in the US enjoy high levels of liquidity, making it easier for them to grow quickly. They also benefit from regulation that is less complicated and easier to navigate compared to the UK.”
Naureen Zahid, Director, Investor Relations at OpenOcean outlines some of the reasons why the US is winning the race:
“Historically, many firms have opted to publicly list their companies within the US over choosing to list within the UK. The US has offered access to a much larger pool of capital, as well as a market with far more tolerance for risk in backing new and innovative products – even at earlier stages in their growth trajectory. This move has been perpetuated by the shifting UK market dynamics and important concerns about the trading environment within the UK, including the effects of Brexit,” she says.
Dollars, dollars, dollars…
Effectively, the FTSE is a boomer Index, with most of its sales conducted in USD (75%). Why then, would you care about listing in London if this is the case?
As an entrepreneur interested in huge, visionary ideas, Newns knows that to try and create the next big, global businesses of tomorrow, you go to the US, not the UK, to raise money privately or to list publicly.
“Innovator, Arrival left to list on the NASDAQ as did 4D Pharma (via a SPAC). We have incredible entrepreneurs and innovation talent here, but to keep them we must transform the landscape. We have to change the FTSE to make the UK the best place in the world to raise public money,” he says.
It’s already a challenging time to list, with risk aversion increasing given rising inflation and central bank monetary tightening.
“In this environment, firms are more likely to take a chance on New York for public future, particularly given listings on US exchanges have raised far more than in London, for example. But it doesn’t guarantee that there still won’t be a bumpy ride, given the volatility right now in financial markets,” warns Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown.
Change is afoot
More incentives to keep domestic start-ups in the UK before they reach the listing stage are vital to growing a pipeline of IPOs.
“The perception is growing that it’s harder starting off as a listed entity in London than New York. The City had been pedalling hard to attract new IPOs with help from the Government’s listing rules shake up but it’s an uphill struggle. Two key reforms have been passed and brought in, with rules relaxed to permit dual-class structures and enable more SPACs to operate,” says Streeter.
According to Streeter, the Government is considering more proposals, such as eliminating the two-tier listing structure. One option being reviewed is to soften the current rules requiring three years of revenue history. This could help attract more biotech firms in particular.
“But more incentives to keep home-grown start-ups operating in the UK before they reach the listing stage are also considered to be crucial to develop a stronger pipeline of IPOs,” she adds.
Too little, too late?
Ramrachia warns that the time to implement change is now.“While it is promising that Jeremy Hunt has announced that he will put forward a plan to make the UK a more attractive listing destination in his Autumn Statement, change cannot wait until then. The UK cannot afford to lose out to competitors such as China or the US. If the Government is serious about boosting economic growth and nurturing the UK’s innovative spirit, it must take action now,” she advises.
New reforms to increase the attractiveness of the LSE, with more specific details to be outlined in the 2023 Autumn Statement, may be too little, too late. To encourage growth in the UK market, and for firms to list domestically, we must create a business environment that fosters innovation, provides access to capital and supports growth, suggests Zahid.
“This will likely require changes to the FTSE listings rules, which are starting to look antiquated compared to other markets. Alongside it, we need more ambition from the UK Government in encouraging the titans of private capital to back UK plc. Recent ideas, such as the efforts to get major pension funds to back a proposed UK sovereign wealth fund, are the type of bold steps that will help make the UK a more attractive destination for firms looking to raise funds and grow their businesses,” she adds.
Fears are growing of a new stock market crash in 2023. Inflation rates were meant to drop, bringing interest rates down with them. That hasn’t happened so concerns over base rates rising remain. High-interest rates make cash and bonds more promising and borrowing more painful. This creates doubt. Uncertainty pushes cash away from the stock market and into safer havens.
As one of the worst-performing indices in recent years, London’s equity benchmark is unexciting for investors. Money and reputation are always at risk in the stock market – valuations change daily and nothing is set in stone. But some risks are much more exciting than others.
“Let’s be a bit more brash, let’s take more risk and let’s really capture what we are missing which is our ingenuity coupled with the US’ desire for having a go,” advises David Belle.
When approached for comment, Julia Hoggett, CEO at LSE plc, remained optimistic about the future and the impact of the FCA’s proposed changes to its UK listing rules:
“The FCA’s proposed changes to the listing rules, which include a single segment and a disclosure-based approach, are a meaningful step forward towards ensuring the UK remains a leading global capital market.
“We believe this approach strikes the right balance in creating a simplified listing regime for companies whilst giving investors the information they need to make informed investment decisions and creates a level playing field for UK companies competing with international peers. These proposed rule changes are just one element of the reforms needed to improve the competitiveness of the UK’s capital markets. We look forward to engaging further on this agenda through the months ahead.”
While London is still a major international financial centre, it has been a challenging few months for the LSE. Something needs to change soon before the market becomes irreversibly inferior.