Upton Sinclair once said, “It is hard to get a man to understand something when his salary depends on not understanding it.” This sentiment seems to ring true when examining the outlook for Britain’s stock market. Despite the efforts of bankers, stock-exchange bosses, and politicians to paint a rosy picture, doubts about its future run deep.
Once there was talk of a “Big Bang 2.0” to rejuvenate the City of London and attract initial public offerings (IPOs). However, this vision has fizzled out, and what remains are mere “Edinburgh reforms.” The lack of progress and economic impact has left many questioning the market’s future viability.
In reality, companies considering an IPO venue are more concerned about the potential value of their shares and local investor support, rather than the listing rules. This underscores the longstanding challenges faced by the City. It seems even those running Britain’s stock exchange harbor doubts about its future, as evidenced by their recent advertising campaign focusing on their global reach and service offerings, rather than just being a stock exchange.
The prevailing consensus is that London is a poor choice for listing, leading international firms to look elsewhere. Existing listings in London also face challenges, with persistently low valuations deterring potential investors. The roots of this issue can be traced back to British pension funds favoring bonds and foreign securities for decades, leaving fewer domestic capital investments available. This has resulted in a stock market heavily populated by traditional businesses like banks and insurers, making it less attractive for new, innovative companies.
While these factors justify the undervaluation of London-listed stocks to an extent, they do not fully explain the scale of British underperformance. The FTSE 100 index now trades at around ten times the value of its firms’ annual earnings, while America’s S&P 500 index has seen a strong recovery, surpassing 21 times its firms’ annual earnings. This divergence suggests that investors expect much faster profit growth from American shares.
British FTSE 100 firms, on the other hand, are already making profits worth 10% of their value each year, making them an appealing investment compared to low-yield alternatives. Despite this, the market has failed to attract international investors, leaving the question of why unclear. Potential reasons such as shifting investment patterns, sectors with dwindling profits, and the current state of the British economy offer some insights, but no single explanation is fully convincing.
Looking ahead, the future of London as a global-equity hub remains uncertain. The challenge now is to find a way to turn the tide and restore the stock market’s appeal to both domestic and international investors. The path forward is unclear, but necessary for the market’s revitalization.
For more in-depth analysis of financial markets, take a look at Buttonwood, our columnist on financial markets. The future of Britain’s stock market is on the line, and it’s a subject worth delving into.
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