Is the London Stock Exchange really the world’s bargain market?

Thursday May 23, 2024 1:48 PM

There is a prevailing narrative that London is systematically undervalued as a market. Is that the case? Charlie Conchie takes a look

There is a prevailing narrative that London is systematically undervalued as a market. Is that the case? Charlie Conchie takes a look

Julia Hoggett was in a jovial mood as she addressed a room full of capital markets bigwigs at the Guildhall on Monday morning.

“Thank you to the City of London for providing an inclusive platform. My biggest fear in public speaking is not being able to see over the top,” Hoggett joked to the City Week Forum.

The small stature of the head of the London Stock Exchange has always belied her willingness to get into trouble with brooding people trying to undermine her market. Hoggett is all over town. At every capital markets event, the stock exchange’s chairman will take the stage to hold her naysayers to account and try to combat what she sees as the unreasonably negative narrative plaguing London.

Now speaking following a fortnight of brighter news in the Square Mile, she defended the view that London is systematically undervalued as a market.

“There is another story that valuations are higher in the US,” she said. “On an absolute multiple based on the composition of indices, that may be the case, but it is also a meaningless number for any individual company.”

These views are not new from Paternoster Square. Hoggett’s boss David Schwimmer has firmly dismissed the valuation gap as a “myth”, describing the story of an exodus from London as “silly” and “ridiculous” in a recent podcast.

But the perception of London as a bargain has haunted the market for more than a year and the huge premiums paid by bidders have fueled a sense that London-listed companies are ripe for the picking.

In the past week, two companies received bids from private equity that were 70 percent higher than their price on the public markets. According to Peel Hunt, the average price offered by cash buyers during a flurry of public-private activity in the first quarter of this year was 69 percent.

Shell chief Wael Sawan raised existential questions for the city earlier this year when he put forward a US move on the grounds that the company’s US rivals are trading at higher prices.

It all contributed to the feeling of ‘everything has to go’. But is it as simple as that?

Can the London Stock Exchange recover?

“Ultimately it’s about individual companies,” says Tineke Frikkee, a fund manager at Waverton who was brought in in 2018 to revive the British equities division. “The rating reflects what is in it. And it is, I think, too easy to just say that London is cheaper than other markets.”

Waverton is a Shell holder, and Frikkee argues that Sawan’s reading of the sagging valuation compared to Exxon’s ignores the individual nuance of the companies.

Shell’s oil production has leveled off in recent years, while that of American oil companies has increased, she says. Shell and London-listed peer BP are also more exposed to the volatility of the commodity markets, where they make huge trading profits.

“It’s too easy to say ‘oil company-oil company, they have to be the same’. Markets don’t work that way,” Frikkee adds. “I do believe that over the long term, stocks are priced as they should be, but they really reflect those differences.”

Analyzes from investment bank UBS seem to support her position. The bank combined comparable stocks last year and found that US companies were trading at similar multiples on a comparable basis to companies on the other side of the ocean.

Comparing companies such as BP and Exxon Mobil, and Vodafone and T-Mobile, UBS’s research found that 55 percent of US companies were trading at a premium of more than ten percent to their British listed peers. However, the rest of the peers traded within ten percent, which James Arnold, global co-head of strategic insights at the bank, described as a rounding error.

“We are not evangelists for Britain, we try to be balanced and thoughtful.”

James Arnold, global co-head of strategic insights at UBS

“We are not evangelists for Britain, we try to be balanced and thoughtful,” Arnold said City AM. when he published the study.

The bank threw its weight behind the UK stock market earlier last month, raising its rating from “least” to “most” preferred for UK equities; a radical upgrade to the outlook for UK equities.

Much of the inequality between Britain and the US has been fueled by the blockbuster valuations of the so-called ‘magnificent seven’ US technology shares, which have soared in recent years and shifted the major indices higher.

That has also led to an exodus of US investors from UK equity funds away from the London Stock Exchange to the United States, putting downward pressure on the market by forcing fund managers to sell their investments to meet demand.

UK equity funds saw outflows rise to the highest level since February 2023 in the first three months of the year, capping 34 consecutive months of net turnover, Calastone data showed. US-focused funds, meanwhile, saw record inflows.

While fund managers like Waverton’s Frikkee say the view that London is undervalued is too broad, dozens of others disagree.

“There are a lot of cheap listed companies in Britain. If active market participants don’t want to buy them, others will clearly be happy to step in and eliminate the undervaluation.”

Ambrose Faulks, co-manager of the UK Select fund at Artemis

“There are a lot of cheap listed companies in Britain. If active market participants don’t want to buy them, others will clearly be keen to step in and clear the undervaluation,” said Ambrose Faulks, co-manager of the UK Select fund at Artemis. City AM

With the UK economy looking set for a softer landing than many expected, fund managers are starting to see value in the smaller, more domestically focused part of the market, which is under the most pressure from an economic downturn and exit the cash flow. market.

Hoggett says quality companies can find investors wherever they are listed. It appears that opportunistic investors looking for good companies at bargain prices are taking a similar stance.

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