Market Analysis – Q2 2024
The LSE looks to have turned a corner in the first half of 2024. Following a miserable few years which appeared to presage the beginning of the end for the London market as companies such as CVC and ARM chose to IPO elsewhere, things seem to be looking up. There’s talk of a rally…
A big boost is coming from Chinese online fashion giant, Shein, which is believed to be planning a multi-billion pound London flotation, and there are strong rumours that Raspberry Pi is thinking about a multi-million pound London listing, too. If true, these IPOs will follow Air Astana, Fuel Ventures VCT and MicroSalt, to paint a picture of a rebounding market with a developing strong pipeline of future new listings. In addition, the market can look forward to a Tell Sid-style sell-off of the government’s shares in NatWest alongside an institutional placing.
Factors that are helping to sustain this impression include the FTSE main index closing at a record high in recent weeks, reports in the media about a potential cut to interest rates in June, falling inflation and a “gang-busters” economy: GDP grew unexpectedly by 0.6% in the three months to March according to the Office for National Statistics, pulling the country out of recession.
Investors appear to be falling into line: UBS has announced that it has upgraded its rating of UK stocks and is planning to increase its investment in UK equities because of an anticipated resurgence in the attractiveness of energy and commodities industries, the London markets’ bailiwick.
Leading the charge is the Chancellor of the Exchequer, Jeremy Hunt, who convened a group of “tech titans and entrepreneurs” (The Times), at his weekend residence, Dorneywood on May 16th, to encourage them to float on the London Stock Exchange and drum-up more business.
These announcements and events combine to create a convincingly up-beat outlook, but is it sustainable? Companies listed on the UK market remain significantly under-valued and there has been a steady stream of companies moving their listings from London as a result, including Flutter Entertainment and CRH. Other smaller cap companies such as, C4X Discovery and Redx Pharma have delisted from AIM, and Oxford Cannabinoid Technologies, has announced plans to delist, too. More money has been flowing out of the market than going in for the last 34 months on the trot, according to the Investment Association; and only two per cent of the $11.9 billion raised through flotations in Europe so far this year, has resulted from London listings.
An uptick in the number of mergers and acquisitions in the UK has been hailed as a potential boost to the markets as exiting fund managers look for new homes for their cash. But not all of the proceeds from exits will be re-invested into the market; some transactions are companies that are being taken private, such as Darktrace.
There are hopes that the Chancellor’s Mansion House Compact, the impact of last year’s Edinburgh Reforms, proposed new investment vehicles such as the UK Isa for investments in UK equities, and potential regulations and changes to listings requirements coming into effect later this year could cement these signs of a burgeoning bounce back.
Talking with clients and fellow advisers over the last few months, a number of issues stand-out that are discouraging companies from floating in London.
Confidence in how the market is perceived, particularly by international investors, is key. Directors complain of a legacy Brexit hangover resulting from the impression that the UK was insular and didn’t prioritise direct foreign investment. While this perception has now faded, the London market has been slow to recover ground. A concerted PR effort by the LSE to engage with overseas investors to address this misplaced view would be welcome.
The London market is also considered expensive compared to other markets where companies can get greater liquidity at a cheaper price. For smaller companies in particular, the regulatory burden – despite the recent reforms – remains considerable which makes it very costly to comply. Even for larger companies, the UK market’s ‘gold-plated’ standards can be very off-putting. Rather than expect new companies to comply straight-away, perhaps the standards should be considered more of a long-term goal with a pathway to achieving them over a number years? Making it cheaper and easier to list would make the market more attractive.
Finally, activity breeds confidence. We need to get the smaller end of the market to start functioning again by listing the right companies in the right place and where there is the greatest fit (according to the management team), rather than pushing companies to list on the Premium, Standard or AIM markets because of their credentials on paper. Greater flexibility over the different markets and applicable listing standards would encourage more companies to take the plunge.
All of these issues are eminently fixable and well within the LSE’s purview. Let’s take advantage of the fair wind blowing in London’s direction to get these problems fixed.
This article was originally published in the Q2 2024 Corporate Advisers Rankings Guide. For more information, please contact Joseph Archer.
