Thursday, May 23, 2024, 1:48 p.m
There is a perception that London is systematically undervalued as a market. If this is the case? Charlie Conchie takes a closer look
Julia Hoggett was in a cheerful mood as she spoke to a room full of capital market luminaries at the Guildhall on Monday morning.
“Thank you to the City of London for providing an inclusive panel. “My biggest fear of public speaking is not being able to keep track of things,” Hoggett quipped to the City Week Forum.
The London Stock Exchange chief’s petite stature has always belied a willingness to take on troublemakers seeking to undermine her market. Hoggett is all over the city. At any capital markets event, the exchange chief will be on stage, taking her naysayers to task and trying to combat what she sees as the unduly negative narrative that plagues London.
After two weeks of sunnier news in the Square Mile, she came to the view that London as a market was systematically undervalued.
“There was another narrative that valuations were higher in the U.S.,” she said. “At an absolute multiple based on the composition of the indices, that may be the case, but it is also a meaningless number for any individual company.”
These views from Paternoster Square are not new. Hoggett’s boss David Schwimmer has firmly dismissed the valuation gap as a “myth”, describing the narrative of an exodus from London as “silly” and “ridiculous” in a recent podcast.
But the perception that London is a bargain market has been hanging over the market for over a year, and the huge premiums that bidders are paying are fuelling the feeling that London-listed companies are easy prey.
Last week, two companies received offers from private equity firms that were 70 percent higher than their price on the public markets. The average price offered by cash buyers across a range of public-to-private activities in the first quarter of this year was 69 per cent, according to Peel Hunt.
Shell boss Wael Sawan raised existential questions about the City at the beginning of the year when he floated a move into the US on the grounds that the company’s US competitors were trading at higher price multiples.
All of this has led to the feeling that everything has to go. But is it that simple?
Can the London Stock Exchange recover?
“Ultimately, it’s about individual companies,” says Tineke Frikkee, a fund manager at Waverton who parachuted in in 2018 to revive its UK equities division. “Valuation reflects what’s inside. And I think it’s too simplistic to say that London is cheaper than other markets.”
Waverton owns shares in Shell and Frikkee argues that Sawan’s assessment of the group’s declining valuation compared to companies like Exxon ignores the individual nuances of each company.
Shell’s oil production has stagnated in recent years while the major US companies have increased their production, she says. Shell and its London-listed competitor BP are also more dependent on the volatility of the commodity markets, where they make huge trading profits.
“It’s too easy to say ‘oil company-oil company, they must be the same thing.'” Markets don’t work like that,” Frikkee adds. “While I believe stocks are priced as they should be in the long run, they really reflect those differences.”
An analysis by investment bank UBS seems to support their view. The bank paired up like-for-like stocks last year and found that U.S. companies traded on a like-for-like basis at similar valuation multiples to companies across the pond.
Comparing firms such as BP and Exxon Mobil, as well as Vodafone and T-Mobile, UBS’s research found that 55 percent of U.S. firms traded at a premium of more than 10 percent to their U.K.-listed peers. But the rest of the comparable companies were within 10 percent, which James Arnold, global co-head of strategic insights at the bank, said was a rounding error.
“We are not evangelists for Britain, we try to be balanced and thoughtful.”
James Arnold, global co-head of strategic insights at UBS
“We are not evangelists for the UK, we try to be balanced and thoughtful,” Arnold said City AM. when he published the research results.
The bank gave strong support to the UK stock market early last month, upgrading its rating on UK stocks from “least preferred” to “most preferred”; a radical improvement in its forecast for UK stocks.
Much of the inequality between the UK and the US has been exacerbated by the blockbuster valuations of the so-called “Magnificent Seven” technology stocks in the US, which have soared in recent years and pushed major indices higher.
This has also led to an exodus of US investors in UK equity funds from the London Stock Exchange to the US, putting downward pressure on the market as fund managers were forced to sell their holdings to meet demand.
UK equity funds saw their highest outflow since February 2023 in the first three months of the year, marking 34 consecutive months of net selling, according to data from Calastone. US-focused funds, meanwhile, saw record inflows.
While fund managers like Waverton’s Frikkee say the view that London is undervalued is too broad, many others disagree.
“There are lots of cheap listed companies in the UK. If active market participants don’t buy them, then others are obviously happy to step in and leverage the undervaluation through arbitrage.”
Ambrose Faulks, Co-Manager of the UK Select Fund at Artemis
“There are lots of cheap listed companies in the UK. If active market participants don’t buy them, then others are obviously happy to step in and eliminate the undervaluation through arbitrage,” said Ambrose Faulks, co-manager of the UK Select Fund at Artemis. City AM
As the U.K. economy appears to be weathering a weaker landing than many expected, fund managers are starting to see value in the smaller, more domestically focused end of the market, which has come under the most pressure from an economic downturn and an outflow of cash Market.
Hoggett says quality companies can find investors wherever they are listed. It seems that opportunistic investors looking for good companies at bargain prices take a similar view.