Dear reader,
I want to say upfront that I am not irredeemably gloomy about the prospects of the UK stock market.
In the week last year when SoftBank chose New York for the listing of Arm at the same moment that building materials group CRH proposed a move to the US, I began to feel distinctly more cheerful. Amid the general pandemonium and finger-pointing, a sense of urgency (that campaigners for reforming the London market had long demanded) was everywhere.
Yes, as a group of global investors warned last week, there is a danger that changes to listing rules and the hacking back of governance standards itself become detrimental to London’s reputation.
But the idea that London will always flourish because it always has is long gone. The City has many advantages that aren’t easily or quickly eroded. However, its position as a natural and obvious choice for global companies looking to list is no more. It will have to fight for investment dollars and new listings and quite possibly carve out a new raison d’être, perhaps more domestic or regionally focused, than in the past.
It is interesting to see the global reach that was always London’s calling card become something of a liability. This is most obviously true in the (actually relatively short) list of companies such as CRH and Flutter that have opted to shift their listing to the US to reflect the global make-up of their business. Only 18 per cent of the FTSE 100’s revenues are generated in the UK, compared with 52 per cent in the 250.
There is another trend to watch for — one I’m calling BILGE for Buy In London, Go Elsewhere.
It’s hardly a secret that the UK stock market has proved a fertile hunting ground for private equity funds in recent years. You can argue about how big the UK market valuation discount really is, compared with the crude price-earnings basis that values the S&P 500 at double the FTSE 100.
London Stock Exchange Group boss David Schwimmer says the idea of higher valuations in the US is a “myth”, once adjusted for sectors and growth rates. But most advisers and analysts believe there is a discount, even once adjusted for everything in sight. And therein lies a problem.
When you look down the list of companies taken private from the London market in recent years, it is questionable how many of them will be returning to UK shores, as initial public offering markets reopen.
True, the biggest of the bunch is Wm Morrison, a company for which it would be virtual insanity to list elsewhere. After that, you get a far more global bunch.
Take Signature Aviation, the private jet business taken private by Blackstone in 2021 and a company that made more than 90 per cent of its sales in North America in 2022, according to S&P Capital IQ. Do you think that business is coming back to the UK market? I wouldn’t bet on it.
What about HomeServe, the home repairs and emergency services group taken private by Brookfield in 2022? It made almost half its sales in the US when it was taken off the stock market and a quarter in the UK. I could keep going down the list of strikingly global companies.
I’m not making predictions. Companies choose their listing venues for a whole host of analytical and touchy-feely reasons, including where their staff and assets are, or where their boards and management teams prefer to spend their time.
But the promise of an easy win — or a few turns on a company’s valuation that isn’t reliant on nuts-and-bolts performance improvement — is a powerful one, particularly for private equity. As one adviser puts it: “If you have sufficient international revenues to be relevant, then going private and listing elsewhere looks an attractive flip.”
This need not spell doom and gloom for London but it certainly reinforces the need for reinvention. The stock exchange has already hugely upped its lobbying and networking among the larger venture capital-backed start-ups that could be headed towards a listing.
It is also, I’m told, scanning private equity portfolios to look for companies that could be a fit for London. The reforms already proposed (though not crucially all yet enacted) have narrowed the perceived disadvantage in terms of flexibility and governance compared with venues on the continent. And London still brings with it a greater profile and potential following than most rival European venues.
There will be wins — but they won’t come easy.
A few good reads
Judging by the readership of the Lex column this week, there remains much interest in the state of hard-pressed European banks.
Barclays is heading into what is seen as a crucial strategy day next week. An offering of higher cost cuts, or increased targets for return on tangible equity, won’t be enough to change a three-year streak of share price underperformance, argued Lex. The market is still looking for a firm pronouncement on the future of investment banking.
Another UK-listed bank; another strategic problem. Standard Chartered releases its results next week. Its shares have trailed far behind banks in the fast-growing Asian economies that are its focus. There is talk of internal restructuring. There is talk of a political heavy-hitter as a new chair. Lex thought the lender needed something more drastic.
Lex also looked to the future this week. Japan’s convenience stores are an institution, offering everything from takeaway food to WiFi, cash and parcel delivery services. What they don’t increasingly have is staff, at least of the human variety. Lex looked at the rise of the robots.
This week’s Schadenfreude Special was served up by ride-share company Lyft, which managed to add a zero to guidance for its ebitda margin. The company was forced into a humiliating correction on a call with analysts. Lex argued that the original erroneous guidance was preposterous. But the company could yet salvage some satisfaction from its abject embarrassment.
Things I have enjoyed this week
You may already have realised that if you’re looking for classical music and film recommendations in this section, then you need to sign up to Stephen Bush’s Inside Politics. (At least when I’m writing. I won’t besmirch my colleagues).
I spent part of this week at the cultural hotspot that is a Dutch Center Parcs. The children enjoyed the pool and the soft-play assault course. I enjoyed the huge and enduring discount of these sites in the Netherlands and Belgium compared with their UK equivalents. I know you come to Lex for financial analysis. That is my arb of the week.
Part of being a journalist is experiencing intense professional jealousy when someone else writes a good intro. This week, New York Magazine’s The Cut provoked this feeling twice:
In the summer of 2022, I lost my mind.
— A simple tale of a relationship told in a compelling way.
On a Tuesday evening this past October, I put $50,000 in cash in a shoe box, taped it shut as instructed, and carried it to the sidewalk in front of my apartment, my phone clasped to my ear. “Don’t let anyone hurt me,” I told the man on the line, feeling pathetic.
— This was a piece much, much discussed on the internet. Is there a scam out there that would get all of us? And why don’t people see it in the moment?
Don’t fall for anything this weekend,
Helen Thomas
Head of Lex
