London’s loss of stock market lustre is a question of liquidity

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Fears that a flood of listed companies would ditch London for New York have proved unfounded. But there has undeniably been a trickle — and it is one that could, if left unchecked, become a troublesome stream.

Machine-rental company Ashtead this month became the latest FTSE 100 member to announce plans to move, following betting group Flutter and building products maker CRH. Add in delistings, and the total number of exits from the London Stock Exchange this year is nearing 90 — the worst year for departures since the financial crisis.

London’s battle to retain listings is in some ways more feeling than fact. Many of the popular arguments for leaving, which have gathered momentum since 2016’s Brexit vote, are weaker than they sound.

First, leaving London is not a shortcut to a surging share price. LSEG chief executive David Schwimmer has described the idea that US companies get better valuations as “a myth”, and analyses by UBS and the Financial Times have found similar results. A big fish in a small pond can even command a scarcity premium. 

Second, upping sticks isn’t the only way to lure deep-pocketed US investors. True, inclusion in widely tracked indices such as the S&P 500 attracts flows, but a New York listing alone is not enough — most also require a major US presence. And it is not hard for a motivated US investor to reach high quality foreign companies — seven of the 10 largest groups in the FTSE 100 are already majority-owned by US investors. Ashtead has close to 60 per cent US ownership, according to Bloomberg data — a similar level to US-listed CRH.

Where London can’t compete is liquidity. The easier a stock is to trade, the easier it is for investors to take big positions, and the lower the company’s cost of capital. Data can be sliced and diced to make the problem look less acute, but any chief financial officer considering a switch would want to look at the experience of their direct predecessors.

On that measure, things don’t look good for the UK. About 1.3mn US-listed Flutter shares have changed hands each day since it joined the New York Stock Exchange in January — more than twice the number trading each day in the UK during the previous year. CRH’s daily volume in the US is 2.8 times its pre-switch averages. And the effect looks durable: plumbing and heating distributor Ferguson, which switched in mid-2022, has maintained an average US volume of about 1.7 times its UK levels.

There is unlikely to be a single quick fix, though there may be some tweaks executives and policymakers can make to increase liquidity and keep London competitive. Britain’s stamp duty is one distortion to consider. But it’s important to be clear-sighted about the things that truly drive companies away, and those that don’t.

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