LLondon’s stock market faces a deluge of criticism, with global investors comparing it to a “global marshal” struggling to attract and retain the growth companies that excite investors and build the 21st century economy.
However, after a wave of IPOs in 2021, including high-tech companies like Oxford Nanopore, and new listing rules, London’s status as a global financial center may improve in 2022.
Currently, the FTSE 100 Index of Blue-chip Companies appears to be outdated. Technology only accounts for around 2% of the London market, compared to 20% in global markets.
“This means London is ten times underweight in the part of the economy that is growing faster and attracting high valuations,” said Simon French, chief economist at Panmure Gordon.
“If you are an investor looking to invest in growth, you don’t have a lot of options in the UK public market, with the utmost respect to Sage and Micro Focus. “
Paul Marshall, the boss of the £ 40million ($ 55 billion) hedge fund Marshall Wace, wrote in the Financial Times that the City of London was in danger of becoming “a sort of Jurassic Park”; and that fund managers were content to reap dividends from the heavy players of the old economy rather than encourage and reward innovation.
French points out that in the US market liquidity has doubled since the financial crisis, but on FTSE All-Share it has more than halved, discouraging some fund managers from investing in London.
“Performance breeds liquidity breeds performance, so London’s underperformance can lead to a vicious cycle,” French explains. He is concerned that recent revisions to the UK’s listing regime have failed to address this liquidity problem.
James Anderson, co-manager of Baillie Gifford’s Scottish Mortgage Investment Trust and an early investor in major US tech stocks like Tesla, compared the FTSE 100 to a 19th century stock market – rich in banks and stocks oil companies, but unfortunately lacking in real innovation.
It will take time for London to shake off that image, French says. “You don’t go from a 19th century scholarship, or a Jurassic Park scholarship, to a Star Trek scholarship overnight.”
There are signs that London is attracting some fast growing companies, with the arrival in the market of Oxford Nanopore, Deliveroo and Darktrace. In total, 122 companies listed on the London Stock Exchange last year, raising more than £ 16.8 billion – the biggest pot of initial public offering since 2007.
But the course has been rocky: Deliveroo fell 30% on its debut in March and languished at all-time highs, while Darktrace was kicked out of the FTSE 100 after its initial share rally waned.
Others have done better, such as consumer review site Trustpilot, which has gained 25% since its IPO. “For every Deliveroo or Darktrace, there is a Trustpilot or Auction Technologies,” French explains.
High valuations across the Atlantic have also hurt London – they mean companies don’t have to sell as much of their business on the Nasdaq, for example, to raise the same money.
that of London new registration rules means that private companies don’t have to sell that many shares to go public. They also allow companies with two-class share structures popular with entrepreneurs and founders to access the FTSE 100 and 250 small business indices.
Marshall, however, says London must act “even faster and harder” to attract growing companies, close the gap with New York and become a more attractive place for listing and raising capital than the EU and Asia.
“London is also the natural home of ESG [environmental, social and governance] winners, emerging market winners and digital assets. To capitalize on these advantages, we need to encourage asset managers to invest in these assets and develop a broader culture of growth-oriented investing, ”he insists.
The move towards ESG investing had worked against London, with fund managers fleeing polluting industries such as fossil fuel producers and mining companies.
London’s problem in 2021 was to retain companies as much as attract new ones. A slew of listed companies have become takeover targets, often by US private equity firms profiting from depressed valuations, such as defense firm Meggitt and UK tech firm Blue Prism, with speculation that BT could be the next.
The weaker pound also left some growing companies sitting like ducks – chip designer ARM, Britain’s tech jewel, was trapped by SoftBank right after the Brexit vote in 2016.
This vacuuming of UK tech companies by US investors worries MEPs, with 130 UK tech companies were reportedly acquired by US companies between January and mid-December 2021.
“We must recognize the impact this has on our own capabilities and sovereign strength,” Tobias Ellwood, chairman of the parliamentary defense select committee, told the Daily Telegraph. “It flies in the face of the government’s long-term, wise ambition to become a high-tech superpower.”
David Miller, executive director of Quilter Cheviot, rejects the idea that the City of London itself risks becoming a lost hole.
“In many ways, it remains a great place for investment managers, with its time zone, language, huge infrastructure and the right attitude. London has always been good for global investment, it’s always watched, not inside, and that makes London the best place for global investment, ”Miller said.
British broker AJ Bell estimates that the FTSE 100 will pay out £ 81.8 billion in dividends in 2021, a 32% increase from 2020, when the pandemic forced companies to cut or suspend payments. Most prominent will be mining companies Rio Tinto and BHP Group, oil company Shell and tobacco company BAT, highlighting the city’s dilemma: Owning these “sin stocks” can generate healthy income, vital for pension funds. and income funds.
Miller cannot see a world in which a balanced portfolio does not have dividend payers as part of the mix; failing to pay a dividend should not lead to the exclusion of a company if its prospects are good.
The balance between growth and value stocks is different today than it was before the dotcom crash two decades ago. “In 1999, people sold companies that paid dividends to buy companies that had just died,” says Miller.
There is also a different mindset for investing across the Atlantic.
“Investors in the United States want the companies they invest in to increase their market share – the market share really turns on American fund managers,” Miller said. In the UK and Europe, the focus is much more on profitability. “If a business isn’t profitable now, we want to know when it will. “
In the short term, the FTSE 100 could benefit if the pandemic eases in 2022, lifting up banks, mining companies, oil companies, travel and hospitality companies. JPMorgan recently raised its rating on UK equities to “overweight”, noting that UK stock markets are now trading at a “record haircut”.
Matt Weller, global head of research at Forex.com and City Index, agrees that much of the FTSE’s underperformance is due to sector weights.
“The FTSE’s strong allocation to the underperforming consumer staples and financials sectors (both weighted nearly 20%) overshadows the index’s tiny (less than 2%) exposure to tech stocks, exactly. the reverse of the allowance you would create in hindsight. , says Weller.
“Of course, markets are very cyclical and the recent rise in inflation and interest rates could be the catalyst for a shift in sector performance in favor of FTSE weightings in the coming quarters.”
London also lost to Amsterdam in the race to attract the big “blank check” companies to Wall Street looking for a fledgling business to acquire. London’s first Special Purpose Acquisition Company (Spac) was launched at the end of November, when Amsterdam had already accumulated 13.
In the long run, local trade could be pushed further towards the margins. 24 Exchange, a Bermuda-based crypto and currency trading platform, plans to introduce 24-hour stock trading, which is already possible with cryptocurrencies.
Miller says the general idea of 24 hour trading is not “totally ridiculous.”
“The transition from trading to ground where we are now is not going to end where it is now. “
To some extent, exchanges are already open 24 hours a day during the work week, with the stock exchanges in the Asia-Pacific, Europe and New York markets together covering most time zones. But many stocks are only listed on one exchange, and liquidity in individual companies is best when their local stock exchange is open.
Non-stop trading could be exhausting for stock traders, although nothing other industries cannot handle.
“If the auto industry can work three shifts a day, why can’t the traders? Miller points out.