‘Apocalypse Nearly’ for the London Stock Exchange

Many of us began 2023 glued to the TV adaptation of The Last of Us – a post-apocalyptic romp through a fungal-zombie infested North America that’s more relatable after living through Covid.

Indeed, when I completed the computer game precursor to The Last of Us in 2013, it felt like pure escapism.

But after a global pandemic, lockdowns and emergency vaccinations, war in Europe, and the febrile politics of recent years, disaster seems closer to home.

There seem to be worries wherever you look – from a potential nuclear escalation with Russia to conflicts over Taiwan to ChatGPT growing a mind of its own.

Maybe this existential gloom is stoking my fears for the London Stock Exchange.

London under siege

In more than 20 years as an investor, I’ve seen the LSE survive many challenges.

The wealth-destroying crash of the early 2000s. AIM-listed companies that turned out to be frauds. The vote to take the UK – and hence The City – out of the EU. Lousy returns for the FTSE 100 for decades. Not to mention the financial crisis of 2007 to 2009.

The LSE has soldiered through it all.

However, the reality is most things end not with a mushroom cloud of instant annihilation – but rather a whimpering slow decline. And it’s hard to overlook the drip drip drip of bad news torturing the LSE.

• The Paris Bourse has overtaken the London Stock Exchange in terms of size.
• The European Commission wants the €1.5trn euro clearing market to be entirely moved from London to the continent by summer 2025.
• Leading chip designer ARM is to float in New York, despite UK government lobbying and ARM’s base being in Cambridge.
• FTSE 100 building supplier CRH is also moving its main listing to New York.
• A slew of UK small and mid cap companies have been acquired in the past 18 months – arguably on the cheap – thanks to depressed valuations in London and the weakness of the pound.
• At the same time, London is suffering an IPO drought. The total number of new listings is sharply down since 2021. And there’s been no blockbuster flotations to compare to the listing of Porsche on the Frankfurt market last September.
• This evaporation of deal flow has caused key players in London’s ecosystem to merge or be acquired. Cenkos and FinnCap consolidated forces in March, while Deutsche Bank acquired boutique investment bank Numis in April.

Sure, nearly all stock markets have struggled since the roaring bull market of 2021 gave way to a global bear market in 2022.

But it’s the UK market that seems to be at risk of losing the critical mass that long gave London an outsized position on the global stage.

The UK stock market made up more than 9% of the global capitalisation in 1999.

Today, that figure is barely 4%.

Survivalist mentality

At this dark hour in a zombie flick, our hero would abseil in through the only open window, guns blazing and generally showing the undead horde who’s boss.

I can’t give you Pedro Pascal with a shotgun.

But how about UK Prime Minister Rishi Sunak armed with the realisation that business – and in the UK, financial services in particular – is the goose that lays the golden eggs?

Without getting deeply into the politics, the UK government appears to have woken up to the damage done to Britain’s financial reputation in recent years – which hit a low point with the run on the pound and the bond market mayhem following the 2022 Mini Budget.

Since the subsequent change in administration, chancellor Jeremy Hunt has reassured markets and brought down interest rates, and the pound has rallied – hopefully encouraging international capital to put more money to work here.

We’ve also had the Edinburgh Reforms unveiled by Hunt in late 2022. While not exactly the ‘Big Bang 2.0’ some hoped for, this laundry list of technocratic tweaks to the laws governing financial services in the UK might deliver a shot in the arm.

Finally, February brought the Windsor Framework. By resolving issues in Northern Ireland, this deal opens up the potential for better trading relations with the EU, which can only be good for UK PLC.

Gunning for Britain

Of course, many of those setbacks I mentioned – from ARM choosing to list in the US to all those UK firms getting gobbled up by overseas predators – happened following these more positive developments.

So the LSE is certainly not out of the woods yet.

But it’s also important to acknowledge that much of what ails the LSE is going on elsewhere, too.

IPOs are down globally, and investor sentiment is terrible. Indices everywhere have been flirting with bear market territory for more than a year.

And the trend towards companies remaining private – and for private equity and venture capital to subsequently capture more of the growth of the best new companies – was only briefly interrupted in the US by a ‘SPAC’ boom, which ended with 80-90% price declines for shaky outfits floated on Nasdaq in 2021.

But even so, I believe the UK market is at risk of becoming just another also-ran backwater for equities, rather than punching above its weight as it did for years.

Yes, there will probably always be an LSE. There are stock exchanges in Paris, Frankfurt, Amsterdam, Milan, and in many other cities around the world too.

But London long stood head and shoulders above those continental outposts. Only New York, Tokyo, and more recently the Chinese bourses were its rivals.

Let’s hope the LSE’s greatness can be resurrected. Because it’s either that or a slowly zombifying stock exchange.