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When a stock market is shrinking, delistings are demoralising. On Wednesday, Just Eat Takeaway said it would ditch its secondary London listing. It’s a sensible move for the lossmaking company which needs to cut costs. But it again highlights the challenges facing the London market after a stream of departures.
Still, the gloom about the London market looks overdone. The IPO pipeline is improving, even though this year 14 IPOs have so far raised just £750mn. French media conglomerate Vivendi’s planned €6bn-€8bn IPO of its TV business Canal+ is set to be the largest London listing since 2022. That, in turn, could be eclipsed by a proposed listing of Chinese fast-fashion group Shein. The long-awaited crop of fintech listings may even start to arrive.
The London Stock Exchange is hoping that new listing rules will burnish the UK’s appeal. They give bosses more freedom to make decisions without shareholder votes, and make it easier to adopt dual-class share structures. The exchange can also talk up disadvantages faced by relatively small companies that switch a listing to the US. A review of 20 companies that listed in the US since 2014 found more than a third had delisted.
It is true that the US markets are more liquid. Nonetheless the gap is not as big as it as first appears. If 79 megacap stocks that account for over half of US turnover are excluded, the average large cap daily value traded is only 1.3 times those in London and other European markets, according to Euronext.
More troubling is the valuation gap between the UK and US markets which is at a record high. The FTSE 100 forward price/earnings ratio of 12 times is roughly half that of the S&P 500. Much of this gap disappears if highly valued US tech giants are excluded.
Nonetheless, Peel Hunt’s Charles Hall reckons the London market is 20 per cent undervalued. Restless companies could conclude the same, including the likes of Shell, one of the largest on the market.
Those who think the UK market is undervalued want to encourage more domestic investment in UK equities. The share of UK pension assets held in domestic equities has fallen steeply to 4.4 per cent, well below the 10.1 per cent global average. The government has not ruled out forcing pension schemes to invest more in British assets. That would be a mistake, and is likely to provoke an ugly fight with trustees.
But pension funds have a role. They could do more to address the shortage of homegrown capital to help fledgling companies bulk up. Building a pipeline of new companies to replace the departures is the best route to a healthy stock market.