The UK has a two-speed market problem

Dear reader,

It is good practice in life, and journalism, to occasionally check your priors. This week the Lex column published two charts that provided reason to consider ours.

The first was this one:

Biotech minnow Redx Pharma this week declared its intention to delist from London’s junior market, blaming a lack of liquidity on Aim for its exit. The company’s moaning didn’t exactly stack up: it has shrinking revenues, mounting losses and a free float small enough to mean it does qualify for the Aim All-Share index. You can read Lex’s take here.

But life is undeniably tough for UK small-caps at the moment, with the Aim All-Share index trading at its lowest level ever relative to the FTSE All-Share.

What surprised me, after Lex’s Andrew Whiffin crunched the numbers, was that London has seen a pick-up in liquidity this year, defined by the market’s median daily trading volume relative to a company’s shares outstanding.

This is at odds with the overwhelming gloom around the London market this week, even as the FTSE 100 index repeatedly threatened to rise above its all-time record. The boss of independent investment bank Peel Hunt warned about a hollowing out of London, amid a dearth of listings: “If we carry along this trajectory we will end up just like the Irish market, which is dead.”

This followed the bank’s head of research bemoaning the “relentless” pace of de-equitisation, the low valuation of UK companies and the scale of outflows from the UK, which has now lasted for 34 months.

Market-wide liquidity figures don’t make particularly cheerful reading, in fairness. Order book figures from the London Stock Exchange Group show overall daily volumes down 4 per cent year to date, compared with the same period last year.

Frankly, you know it has got bad when a journalist feels obliged to attempt to pierce the gloom. De-equitisation is a global phenomenon, with JPMorgan analysts this week warning that the global supply of public equities is shrinking at its fastest pace in at least 25 years. The number of listed companies in the US has fallen from more than 7,000 to fewer than 4,000 since 2000. (This data almost certainly isn’t like for like but, as a reference, the number of companies listed on the LSE has fallen from more than 3,300 in 2007 to about 1,900 according to Statista).

The US is a vastly larger market, with larger companies. But analysis from both the LSE and Nasdaq suggests that the difference in terms of liquidity, on a median turnover basis, isn’t huge between New York and London (or indeed other markets). The Nasdaq figures suggest that London has fewer star names, getting much more attention and turnover than the market average, which makes sense.

Unpacking the Lex chart above, and looking at which stocks have seen a pick-up, tells an interesting story. Companies such as DS Smith and Mondi are getting attention because of a takeover tussle. St James’s Place is, basically, in crisis mode.

But Haleon, the consumer health group spun off from GSK, also features. Both its major owners, GSK and Pfizer, have placed large chunks of stock in the market in recent months. Both sellers found substantial demand and placed the shares at a pretty tight discount to the market price: Pfizer’s whopping $3bn sale last month (coincidentally worth about the market value of St James’s Place nowadays) was done at a 4 per cent discount.

There have also been a series of big placings in LSEG itself, by owners led by Blackstone and Thomson Reuters, the last of which in March was done at a 0.7 per cent discount. This suggests — and perhaps this seems a low bar but is worth saying amid the drumbeat of misery from around the City — that the main market is functioning pretty well in terms of depth and liquidity for certain global names.

Moreover, some global companies that could logically opt to shift their listing to the US are (either publicly or privately) dismissing this idea as a distraction: British American Tobacco was one of the latest to question the benefits. Meanwhile, Smith & Nephew is one that is trying a new structure to bridge differentials in pay and related governance between the two markets. By this summer, one hopes, the major governance reforms promised to level the playing field between London and other markets should be in place.

This is all decent news if you’re a larger company thinking about listing in London or, indeed, one of the assorted advisers and hangers-on who benefit from that activity. The IPO pipeline isn’t exactly bursting, according to equity capital markets bankers, but nor is it totally dry.

This all raises the question of whether London’s troubles are morphing into more of a two-speed market problem, as Panmure Gordon’s Simon French puts it. Consolidation in institutional investment and the rise of index investing pushes money towards bigger index constituents, leaving just about everyone else and particular mid- or small-cap growth companies out in the cold.

As usual, it is the household names that have garnered most attention in this debate, in terms of the challenge of attracting or retaining big global names. It is now worth prising apart these different issues — not least because the appropriate remedies, for ensuring that promising, smaller companies can raise money in London, are likely to be different from those trained on other parts of the market.

The other chart Lex published that caught my attention this week was this one:

The extraordinary performance of European banks of late — a sector that has for a long time been associated with lacklustre returns, value destruction and political meddling — sparked much discussion among the Lex team. The huge payouts to shareholders that have prompted this rally don’t look sustainable across the sector (and you can read why here).

But some European banks — and this week Lex looked at ING — are doling out funds to shareholders from a position of relative strength. ING may also have an answer on how to keep this going from here.

In Lex this week

• Why exactly is troubled luxury group Kering spending €1.3bn on an iconic Milan building? Buying real estate is not the smartest use of luxury cash flows — even leaving aside the challenges Kering faces with its key brand Gucci. Read more.

• In other tales of troubled governance, entertainment group Endeavor agreed a deal to be taken private by a star-studded cast of majority shareholders this week. Public investors won’t even get a vote on the deal — a fitting end to the sorry show of this company’s time on the market. Find out more.

• The UK windfall tax on oil and gas production should have led to capital fleeing the sector. So why is UK-focused Ithaca Energy considering doubling down on the North Sea through a deal with Italy’s Eni? Read it here.

What I’ve enjoyed this week

Enjoyed probably isn’t the right word but the New Yorker’s take on what 14 years of Conservative rule have done to Britain was a must-read this week.

As a sufferer, I read this take on the “allergy apocalypse” from the Atlantic’s daily email with interest.

On a lighter note, I have mainly been listening to the Dish podcast and Beyoncé’s new country album, which is excellent.

Have a great weekend,

Helen Thomas
Head of Lex