Thursday, May 23, 2024 1:48 p.m
There is a prevailing claim that London is systematically undervalued as a market. it is so? Charlie Conchie takes a closer look
Julia Hoggett was in jovial mood as she addressed a room of capital markets bigwigs at the Guildhall on Monday morning.
“Thank you to the City of London for providing an inclusive stage. My biggest fear of public speaking is that I can’t see past the edge,” Hoggett joked at a City Week forum.
The diminutive frame of the head of the London Stock Exchange always belied her readiness to scrap with the grim people who sought to destroy her market. Hoggett is everywhere in town. Any event in the capital markets and the stock exchange boss will be taking her detractors to task on stage as she seeks to counter what she sees as the disproportionately negative narrative plaguing London.
Now, speaking after two weeks of sunnier news on the Square Mile, she compared the view that London is being systematically undervalued as a market.
“There is another story that the valuation is higher in the US,” she said. “On an absolute multiple based on the composition of the indexes, it may be, but it’s also a meaningless number for each individual company.”
These views are not new from Paternoster Square. Hoggett’s boss David Schwimmer strongly dismissed the valuation gap as a “myth” and described the London exodus narrative as “stupid” and “ridiculous” in a recent podcast.
But the perception of London as a bargain bucket has dogged the market for more than a year, and the huge premiums being paid by bidders have fueled a sense that London-listed firms are ripe for the picking.
Last week, two firms received offers from private equity 70 percent higher than their price in the public markets. The average price offered by cash buyers in a flurry of activity between the public and private sectors in the first quarter of this year was 69 per cent, according to Peel Hunt.
Shell boss Wael Sawan raised existential questions for the City earlier this year when he flagged the US move on the basis that the firm’s US rivals were trading at higher multiples.
All this contributed to the “everything must go” feeling. But is it that simple?
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“Ultimately it’s about the individual companies,” says Tineke Frikkee, a fund manager at Waverton, who parachuted in in 2018 to revive its UK equities division. “The award reflects what’s out there. And I believe it is too easy to say that London is cheaper than other markets.
Waverton holds Shell, and Frikkee says Sawan’s reading of its depressed valuation compared to the likes of Exxon ignores the firms’ individual nuances.
Shell’s oil production has stagnated in recent years, while the US majors have been growing, he says. Shell and London-listed peer BP are also more subject to the volatility of commodity markets, where they make huge profits trading.
“It’s too easy to say ‘oil company-oil company, they must be the same.’ Markets don’t work like that,” adds Frikkee. “I believe that over the long term, stocks are priced as they should be, but they really reflect those differences.”
Analysis by investment bank UBS appears to support her view. The bank pooled with similar stocks last year and found that on a comparable basis, US companies were trading at similar multiples to firms across the pond.
Comparing the likes of BP and Exxon Mobil and Vodafone and T-Mobile, UBS research showed that 55 per cent of US firms traded at a premium of more than 10 per cent to their UK-listed counterparts. However, the rest of the comparable firms traded within ten percent, which James Arnold, global co-head of strategic insights at the bank, described as a rounding error.
“We are not evangelists for the UK, we try to be balanced and considerate.
James Arnold, global co-head of strategic insights at UBS
“We’re not evangelists for the UK, we’re trying to be balanced and considerate,” Arnold said AM city. when the research was published.
The bank threw its weight behind the UK equity market early last month, raising its rating from ‘least’ to ‘most’ preferred on UK equities; radically upgrading its outlook for UK stocks.
Much of the divergence between the UK and the US has been fueled by the market valuation of the so-called “big seven” US tech stocks, which have skyrocketed in recent years and skewed the major indexes higher.
It also triggered an exodus of US investors from London stock funds to the States, putting downward pressure on the market by forcing fund managers to sell their holdings to meet demand.
UK equity funds saw outflows in the first three months of the year to the highest level since February 2023, capping 34 consecutive months of net sales, according to data from Calastone. Meanwhile, US-focused funds saw record inflows.
While fund managers such as Waverton’s Frikkee say the view that London is undervalued is too harsh, many others disagree.
“There are a lot of cheap listed companies in the UK. If active market participants don’t buy them, others are apparently happy to step in and arbitrage away the undervaluation.”
Ambrose Faulks, UK Select Fund Co-Manager at Artemis
“There are a lot of cheap listed companies in the UK. If active market participants don’t buy them, then others are obviously happy to step in and arbitrage the undervaluation out,” said Ambrose Faulks, co-manager of the UK Select fund at Artemis. AM city
As the UK economy appears to be overcoming a softer landing than many expected, fund managers are starting to see value in the smaller, domestically focused end of the market, which has been most brutally squeezed by the economic downturn and cash leaving the market. market.
Hoggett says quality companies can find investors anywhere. It appears that opportunistic investors looking for good companies at bargain prices may have a similar view.