Is London losing its lustre as a listing location?

The below is an extract from our Q3 Asset Allocation outlook.

In our blog ‘They say good things come in small packages…’, we highlighted the widening valuation gap between UK large and small caps. Yet even though small caps have become cheaper relative to their large-cap counterparts, the valuation of the UK equity market in general has also reduced.

The valuation discount versus the US is now wider than it has been at any point over the last 19 years:

Relocation, relocation, relocation…

It's therefore unsurprising that we’ve seen a flurry of listings leave the UK. Last year, the decision to list UK chip designer ARM Holdings* solely on the NASDAQ caught attention because prior to being taken private, ARM Holdings* held dual UK and US listings.

This year, UK gambling company Flutter Entertainment* opted for an additional US listing, before transferring its primary listing destination there. Management highlighted the US listing gives “access to the world’s deepest and most liquid capital markets”.¹

Multiple reasons are behind this declining preference for the UK. First, the quote from Flutter cites a crucial one. The relatively lower liquidity of UK-listed stocks has limited institutional demand. The graph shows how liquidity has worsened over the past two decades:

Secondly, executive pay is another factor, with LSE’s CEO Julia Hoggett warning that the UK’s restrictions on pay are hindering companies’ efforts to compete for top talent and retain listings.²

Thirdly, despite the UK pensions sector being one of the largest in the world, UK pension funds have a lower allocation to equities than other countries, and their allocation to domestic stocks is lower too.³ The profile of these funds explains to some extent the lack of ownership of UK equities; however, any increased allocation will lead to more equity capital in the market.

Make it stop

Policymakers are acutely aware of the UK’s standing, and a range of pensions agreements and capital market reforms are underway that aim to improve the attractiveness of our market. A rise in corporate activity (including M&A) in recent months has helped draw attention to the valuation opportunities available, and we’ve noted across the market equity strategists turning more bullish towards the region.

Likewise, if initiatives such as the Capital Markets Industry Taskforce⁴ succeed in increasing domestic capital availability in the UK and addressing some of the other factors we’ve discussed in this article, then both investor positioning and corporate sentiment towards the UK should become more favourable.

Looking for a spark Earlier this year many of our multi-asset portfolios took a tactical position in UK midcaps, aiming to capitalise on the emerging trends described above. We had hoped for a longer window before the elections to draw attention to new policies. But with future catalysts we could re-engage as we believe many of the right ingredients are in place for a turnaround.

The above is an extract from our Q3 Asset Allocation outlook.

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Sources

1. https://www.flutter.com/investors/additional-us-listing/#:~:text=Flutter%20is%20listing%20on%20the%20New%20York%20Stock%20Exchange&text=Subject%20to%20the%20effectiveness%20of,Exchange%20(%22NYSE%22) 

2. Bloomberg UK, 2023: https://www.bloomberg.com/news/articles/2023-10-05/top-city-boss-warns-pay-is-causing-london-to-lose-war-for-talent 

3. Pensions and Lifetime Savings Association, 2023:

https://www.plsa.co.uk/Portals/0/Documents/Policy-Documents/2023/Pensions-and-Growth-Jun-2023.pdf 

4. https://capitalmarketsindustrytaskforce.com/