London’s stock market is facing a barrage of criticism, with global investors likening it to a “global backwater” struggling to attract and retain growth companies that excite investors and are building the 21st-century economy.
However, after a surge of stock flotations in 2021, including cutting-edge firms such as Oxford Nanopore, and new listing rules, London’s status as a global financial centre could brighten in 2022.
Currently, the FTSE 100 index of blue-chip companies looks dated. Technology only makes up about 2% of the London market, compared with 20% across global markets.
“That means London is tenfold underweight in the part of the economy growing faster, and which is attracting high valuations,” says Simon French, the chief economist of Panmure Gordon.
“If you’re an investor looking to invest in growth, you haven’t got a lot of options on the UK public market, with the greatest respect to Sage and Micro Focus.”
Paul Marshall, the boss of the £40m ($55bn) hedge fund Marshall Wace, wrote in the Financial Times that the City of London risked becoming “a sort of Jurassic Park”, and that fund managers were content to collect dividends from ponderous old economy players rather than encouraging and rewarding innovation.
French points out that in the US market, liquidity has doubled since the financial crisis, but on the FTSE All-Share it has more than halved, putting some fund managers off investing in London.
“Performance begets liquidity begets performance, so London’s underperformance can lead to a vicious circle,” French explains. He fears that recent reviews of the UK’s listing regime have failed to tackle this liquidity issue.
James Anderson, the joint manager of Baillie Gifford’s Scottish Mortgage Investment Trust and an early investor in major US tech stocks such as Tesla, has compared the FTSE 100 to a 19th-century stock market – heavy with banks and oil stocks, but sadly lacking in real innovation.
It will take time for London to shake off this image, French says. “You don’t go from a 19th-century stock exchange, or a Jurassic Park one, to a Star Trek exchange overnight.”
There are signs that London is beaming up some fast-growing companies, with Oxford Nanopore, Deliveroo and Darktrace coming to market. In total, 122 companies listed on the London Stock Exchange last year, raising more than £16.8bn – the biggest initial public offering pot since 2007.
But the journey has been shaky: Deliveroo tumbled by 30% on its debut in March, and is languishing at record lows, while Darktrace was ejected from the FTSE 100 after its initial share surge faded.
Others have done better, such as the consumer review site Trustpilot, which has gained 25% since floating. “For every Deliveroo or Darktrace, there is a Trustpilot or Auction Technologies out there,” says French.
High valuations on the other side of the Atlantic also hurt London – they mean firms don’t have to sell as much of their company on the Nasdaq, tor example, to raise the same money.
London’s new listing rules mean private firms needn’t sell as much stock to go public. They also allow firms with dual-class share structures popular with entrepreneurs and founders on to the FTSE 100 and the 250 index of smaller firms.
Marshall, though, says London needs to move “faster and harder still” to lure growth companies, close the gap with New York and become a more attractive place to list and raise capital than the EU and Asia.
“London is also the natural home for ESG [environmental, social and governance] winners, emerging market winners and digital assets. To capitalise on these advantages, we need to encourage asset managers to invest in these assets and develop a wider culture of growth-oriented investing,” he insists.
The move towards ESG investing had counted against London, with fund managers shunning polluting industries such as fossil fuel producers and mining companies.
London’s problem in 2021 was retaining companies as much as attracting new ones. A string of listed companies became takeover targets, often from US private equity firms taking advantage of depressed valuations, such as the defence firm Meggitt and UK tech firm Blue Prism, with speculation BT could be next.
The weaker pound also left some growth companies as sitting ducks – chip designer ARM, the crown jewel of UK tech, was snaffled by SoftBank just after the Brexit vote in 2016.
This hoovering up of British tech firms by US investors is worrying MPs, with 130 UK tech firms reportedly acquired by American companies between January and mid-December 2021.
“We need to recognise the impact this is having on our own capabilities and sovereign strength,” Tobias Ellwood, the chairman of the parliamentary defence select committee, told the Daily Telegraph. “It goes against the grain of the government’s wise long-term ambition of becoming a high-tech superpower.”
David Miller, an executive director of Quilter Cheviot, pushes back on the idea that the City of London itself risks becoming a backwater.
“In many ways it remains an ideal location for investment managers, with its time zone, language, huge infrastructure and the right attitude. London has always been good at global investment, it’s always looked out, not in, and that makes London the best place for global investment,” says Miller.
The UK broker AJ Bell estimates that the FTSE 100 will pay out £81.8bn in dividends in 2021, a 32% increase compared with 2020 when the pandemic forced firms to cut or suspend payments. The mining companies Rio Tinto and BHP Group, oil firm Shell and tobacco company BAT will dole out the most, highlighting the City’s dilemma – owning these “sin stocks” can generate a healthy income, vital for pension funds and income funds.
Miller can’t see a world in which a balanced portfolio doesn’t have dividend payers as part of the mix; not paying a dividend shouldn’t see a company excluded if its prospects are good.
The balance between growth and value stocks today is different than before the dotcom crash two decades ago. “In 1999, people sold dividend-paying firms to buy firms that just evaporated,” Miller says.
There’s also a different mindset to investing across the Atlantic.
“Investors in the US want the companies they invest in to grow market share – market share really excites US fund managers,” Miller says. In the UK and Europe there’s much more focus on profitability. “If a company isn’t profitable now, we want to know when it will be profitable.”
In the short term, the FTSE 100 could benefit if the pandemic eases in 2022, lifting banks, mining firms, oil companies, travel and hospitality firms. JPMorgan recently upgraded its rating on UK stocks to “overweight”, pointing out that British equity markets are now trading at a “record discount”.
Matt Weller, the global head of research at Forex.com and City Index, agrees that much of the FTSE’s underperformance comes down to sector weightings.
“The FTSE’s heavy allocation to the underperforming consumer staple and financial sectors (both near 20% weighting) dwarf the index’s minuscule (under 2%) exposure to technology stocks, exactly the inverse of the allocation that you’d create with the benefit of hindsight,” says Weller.
“Of course, markets are highly cyclical, and the recent uptick in inflation and interest rates could be the catalyst to shift sector performance in favor of the FTSE’s weights in the coming quarters.”
London has also lost out to Amsterdam in the race to attract “blank-cheque” companies, big on Wall Street, which seek out a fledgling business to acquire. London’s first special purpose acquisition company (Spac) launched at the end of November, by which time Amsterdam had already racked up 13.
In the long run, local exchanges could be pushed further to the margins. 24 Exchange, a Bermuda-based crypto and foreign exchange trading platform, is planning to bring in around-the-clock stock trading, which is already possible with cryptocurrencies.
Miller says the general idea of 24-hour trading is not a “totally ridiculous” one.
“The transition from floor trading to where we are now isn’t going to stop where it is now.”
To an extent there is already 24-hour trading through the working week, with bourses in Asia-Pacific markets, Europe and New York together covering most time zones. But many stocks are only listed on one exchange, and liquidity in individual companies is better when their local exchange is open.
Non-stop trading could be gruelling for equities traders, although nothing that other industries don’t handle.
“If the car industry can work on three shifts per day, why can’t traders?” Miller points out.