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IF Insights: Will the London Stock Exchange be ever competitive?

IFM_London Stock Exchange
Because of the global scope of the listed companies on the London Stock Exchange, the exchange has long drawn an excessive amount of capital from investors compared to the size of the UK economy

Despite the London Stock Exchange Group’s (LSEG) mild recovery in the last quarter of 2023, there has been an outcry from the British private sector that the Rishi Sunak-headed United Kingdom government has not done enough to make the LSEG competitive to take on its New York or European peers.

According to a trading statement for the three months ending on September 30, 2021, annual subscription value (ASV) growth, a metric of recurring revenue that analysts have been closely watching since LSEG’s USD 27 billion acquisition of data and analytics company Refinitiv in 2021, was 7.1%.

This follows investors being alarmed by a decline in the previous quarter.

The Tories and the LSEG board believe that the exchange could outperform rivals, with LSEG CEO David Schwimmer claiming that he was optimistic about the year’s total income growth, estimating it to be between 6% and 8% higher than the projection range.

The majority of LSEG’s revenue currently comes from data and analytics, which increased 7.2% annually to 1.29 billion pounds due to increased sales, more client retention, and a larger yearly price increase, according to LSEG.

With recoveries excluded, the group’s total revenue increased by 8% to 1.96 billion pounds, and its gross profit was 1.77 billion pounds.

Investors, however, are still worried that the Sunak government is not doing enough to ensure that the Londen stock markets remain somewhere near being competitive.

Brexit & The LSEG’s Fall

The London stock market was the most prestigious and prosperous in Europe. After Brexit, approximately 6 billion pounds (USD 7 billion) of daily trade in European Union stocks departed London for exchanges across the Channel.

The Brexit agreement between London and Brussels primarily excluded financial services, thus UK exchange operators are no longer able to offer European customers trading in Britain’s EU-listed equities. Nearly all trading in EU stocks currently occurs on the Continent, where companies in the UK capital like the London Stock Exchange Group, Cboe, and Aquis Exchange activated their venues for EU shares.

In November 2022, France took over the top spot as the most valued stock market in Europe. The incident is believed to be caused by a weak pound, worries about a recession in the UK, and rising sales at French luxury goods manufacturers, according to Bloomberg statistics.

For the first time since records began in 2003, Paris had surpassed London.

Because of the global scope of the listed companies on the London Stock Exchange, the exchange has long drawn an excessive amount of capital from investors compared to the size of the UK economy.

According to Citigroup, 11% of the MSCI World Index in 2000 consisted of UK-listed stocks. The MSCI World Index covers over 1,500 businesses that collectively represent most of the global stock market by value. Some 23 years later, the UK market accounts for barely 4% of the total, according to a Financial Times article.

Large IT IPOs on Wall Street and faster-growing international markets like China and India were attracting investors. In the meantime, UK pension funds have reduced their exposure to domestic stocks to find government bonds with more predictable returns.

Then came Brexit and years of political unrest that damaged Britain’s reputation among investors and damaged London’s position as the capital of European finance.

The combined effect has been detrimental to the FTSE 100, which has lagged behind the gains of benchmark exchanges in the US and the EU since the global financial crisis, even with a recent uptrend.

Concerns about London’s future returned as the world’s largest supplier of building materials, CRH, announced that it would be shifting its principal listing to the United States and chipmaker ARM, the jewel in the UK tech sector, indicated it would stage its initial public offering (IPO) on Wall Street. The biggest listed corporation in London, Shell, also thought about moving. There is a growing concern because the UK economy depends heavily on London’s markets.

When combined, the corporate actions appeared to be “a vote of no confidence in the investment environment here in the UK,” according to stockbroker CMC Markets UK’s chief market analyst Michael Hewson.

The Tory Solution

The Tories almost unanimously have a single ideological solution to the economic crisis in the United Kingdom. The frequently contentious leadership of Margaret Thatcher came to an end 33 years ago in 1990, and April 2023 marked the tenth anniversary of her passing.

However, her legacy lives on, with most of the fundamental ideas and ideology still being highly regarded by most Conservative MPs, members of the grassroots, and voters, as well as conservative media.

The BBC explains, “At its most crude, Thatcherism represents a belief in free markets and a small state. Rather than planning and regulating business and people’s lives, the government’s job is to get out of the way.”

It should be restricted to the essentials: defence of the realm and the currency. Everything else should be left to individuals, to exercise their own choices and take responsibility for their own lives.

The Tories are looking at fewer regulations and encouraging risks in corporations and shareholders as per Thatcheristic policies.

The City of London is up against fierce competition from financial hubs in the European Union and New York for initial public offerings following Brexit.

After being appointed minister of financial services earlier in November 2023, Bim Afolami stated on Tuesday that he would prioritise carrying out the government’s already announced changes, making sure regulators reach their goals for competitiveness, and encouraging “ownership.”

Britain recently announced that it might consider selling shares to the public in an effort to sell its 39% ownership in NatWest Bank.

Afolami stated at a Financial Times banking conference, “We are going to do more in the budget in the spring, to focus on promoting ownership. I am very passionate about this, particularly for younger people.”

Opinion surveys predict that the opposition Labour Party will win the general election in Britain in 2024. It supports promoting more private investment to boost the economy, but it has not yet outlined its proposals should it win the election.

Afolami admitted that the measures to promote ownership and convince pensions to participate in enterprises were long-term, but he did not provide a timeline for any modifications.

Having a greater appetite for risk, under supervision to prevent “bringing the house down” when things go wrong, is part of the solution, he said.

The Final Verdict

According to Afolami, the experience of businesses that choose to list in New York as opposed to London has not been “uniformly positive.”

The British government attempted to convince Arm, a British chip designer, to list in London rather than New York, as the latter’s shares have been trading below the offer price.

The reality is that LSEG has been in a difficult position since Brexit. However, hope remains as many companies are doing poorly at NASDAQ and are looking for alternatives.

The Tory leadership’s response has been chaotic so far. It is to be seen whether a change in policy would attract corporations and if the London Exchange will return to its glory days.

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