The London stock market’s decline is starting to look terminal

Feb 8, 2024

A top executive at the Nasdaq stock exchange in New York recently warned her London counterparts she was on the hunt for more British companies to go public there. 

And why not? Nasdaq had successfully persuaded Britain’s only real tech champion, Arm, to snub no lesser lobbyist than the Prime Minister and float its shares Stateside.

“We’re having a lot of conversations with companies about listing in the US,” Karen Snow, Nasdaq’s global head of listings, said in the run-up to Christmas.

She may not have to search very hard after the reception that Arm has been given in its newly-adopted home. The microchip designer got off to a great start in September, its share price soaring 25pc on the first day of trading to value the company at over $65bn (£52bn).

And it keeps getting better. Shares in Arm surged more than 50pc – to their highest level yet – on Thursday after it revealed booming sales, partly driven by the hysteria surrounding Artificial Intelligence.

It means Arm’s valuation has more than doubled in less than five months to $130bn, leaving Japanese investment giant Softbank, still with 90pc of the shares, sitting on a four-fold paper gain on the $32bn it paid for the company in 2016.

The buzz surrounding Arm is important because it is likely to have profound implications for the future of the UK stock market, and the wider City. 

Some senior fund managers think the stock market will be dead in the next ten years anyway such is the direction of travel.

That feels a touch premature to me but the enthusiasm that has greeted Arm’s arrival in New York certainly risks compounding the image of London as a place to either avoid or escape.

At the same time it reinforces the idea that America is the place to be – somewhere that values success more than we do in Britain. You could never imagine Arm, or any other company receiving the same reception here, certainly not amid the current mood of despair and general apathy. Arm’s board will feel completely vindicated already.

The UK has never been able to match the general enthusiasm that seems to come so naturally to corporate America – it’s just not in our veins – but the doom and gloom about this country’s prospects and that of the City seems more pronounced than ever. Even after the financial crash, people maintained a quiet air of optimism about our ability to bounce back from major crises.

There’s an alarming sense of resignation in the air, at least about London’s waning status as one of the world’s pre-eminent financial capitals – as if it can never again compete with New York. But that’s self-defeating and risks becoming a self-fulfilling prophecy. European cities like Paris and Frankfurt are already snapping at London’s heels but it needs to be aware of the threat from Tokyo and Hong Kong, so too Shanghai and Mumbai.

There is also a lack of money around from investors that actually want to invest in UK stocks at all, nevermind riskier high-growth tech companies. 

Managers of Baillie Gifford‘s UK Growth Trust have accused fellow investors of being “gloomy” and “more interested in what is happening now rather than in a few years’ time”. 

At the turn of the century, UK stocks and shares accounted for around half of the money tied up in UK pension funds. Today they represent less than 10pc of assets.

Analysts at Peel Hunt have warned that the London stock exchange is being sucked into a ‘doom loop’ where valuations are low, liquidity is reducing and the pool of UK listed companies is shrinking. 

The problem is being exacerbated by the sheer number of British companies that have been sold to foreign rivals and private equity but also by the dearth of new companies joining the public market.

The number of UK-listed companies has fallen by 40pc since 2008. Yet, while the Nasdaq raised $13bn in 2023 from new share issues, the London Stock Exchange raised a paltry $972m. It was the first time the LSE has failed to hit the $1bn mark since records began in 1995, according to data from Dealogic.

The investment community only has itself to blame. It is all well and good expecting the Government to ride to the rescue, and there are of course ways that ministers can and are trying to help by removing regulatory barriers. But as Peel Hunt argues, it’s the demand side that really needs addressing because if fund managers are not willing to put their money where mouth is and back risk then why would anyone want to list here in the first place?

In America you can shoot for the stars – people are willing to back you in a big way and there is an appetite for wealth generation that the UK simply doesn’t possess. Instead, there all too often seems to be a sense of cynicism. Why would any company choose that sort of investor base when a much more upbeat one awaits it across the Atlantic?

This trend is looking increasingly terminal for the London stock market. Money attracts money, and this economic gravity is pulling companies to New York. There have been losers in this game before; there used to be a stock exchange in Leeds, for instance.

Beating this force will be tough. The Government can help by kicking down doors but a complete culture change is needed. If investors continue to greet so much of what goes on in London with a collective shrug then companies like Arm will keep leaving until there are very few left.

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