There is a prevailing narrative that London is systematically undervalued as a market. Is that the case? Charlie Conchie takes a closer look
Julia Hoggett was in a jovial mood as she addressed a room of capital markets bigwigs at the Guildhall on Monday morning.
“Thanks to the City of London for providing an inclusive podium. My biggest fear of public speaking is not being able to see over the top,” Hoggett quipped to the City Week Forum.
The London Stock Exchange chief’s diminutive frame has always belied her readiness for a scrap with gloomsters trying to do down her market. Hoggett is everywhere in the City. Any capital markets event and the bourse chief will be on stage taking her naysayers to task and trying to combat what she sees as the unreasonably negative narrative plaguing London.
Now, speaking on the back of two weeks of sunnier news in the Square Mile, she was squaring up to the view that London is systematically undervalued as a market.
“There has been another narrative that valuations are higher in the US,” she said. “On an absolute multiple based on the composition of indices that may be the case, but it’s also a meaningless number for any individual company.”
Those views are not new from Paternoster Square. Hoggett’s boss David Schwimmer has been firm in dismissing the valuation gap as a “myth” and in a recent podcast described the narrative of an exodus from London as “silly” and “ridiculous”.
But the perception of London as a bargain bucket has dogged the market for more than a year and the huge premia being paid by bidders has fuelled a feeling that London-listed firms are ripe for picking.
In the past week, two firms have received bids from private equity at 70 per cent higher than their price on the public markets. The average price offered by cash buyers in a spate of public-to-private activity in the first quarter of this year came in at 69 per cent, according to Peel Hunt.
Shell chief Wael Sawan triggered existential questions for the City earlier this year when he floated a US move on the grounds the firm’s US rivals trade at higher multiples.
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“Ultimately, it is about individual companies,” says Tineke Frikkee, a fund manager at Waverton who was parachuted in to revive its UK equity division in 2018. “The valuation reflects what’s in there. And it is, I believe, too easy just to say London is cheaper than other markets.”
Waverton is a Shell holder and Frikkee argues Sawan’s read of its sagging valuation compared to the likes of Exxon ignores the individual nuance of the firms.
Shell’s oil output has been flatlining in recent years while the US majors have been ramping up, she says. Shell and London-listed peer BP are also more subject to the volatility of commodity markets, on which they make huge trading profits.
“It’s too easy to say ‘oil company-oil company, they must be the same’. Markets don’t work that way,” Frikkee adds. “I do believe that in the long run shares are priced the way it should be, but they really reflect those differences.”
Analysis from the investment bank UBS seems to support her view. The bank last year paired up like for like stocks and found that on a comparable basis, US companies traded at similar multiples to firms across the pond.
Comparing firms like BP and Exxon Mobil, and Vodafone and T-Mobile, UBS’s research showed that 55 per cent of US firms traded at higher than a ten per cent premium in their UK-listed peers. However, the rest of comparable firms traded within ten per cent, which James Arnold, global co-head of strategic insights at the bank, described as a rounding error.
“We’re not evangelists for the UK, we are trying to be balanced and thoughtful.”
James Arnold, global co-head of strategic insights at UBS
“We’re not evangelists for the UK, we are trying to be balanced and thoughtful,” Arnold told City A.M. when he published the research.
The bank threw its weight behind the UK equity market earlier last month, upgrading its rating from “least” to “most” preferred for UK equities; a radical upgrade for its outlook for British stocks.
Much of the disparity between the UK and the US has been fuelled by the blockbuster valuations of the so-called ‘magnificent seven’ tech stocks in the US, which have skyrocketed in recent years and skewed the major indices upwards.
That has also triggered an exodus of US investors from UK equity funds away from the London Stock Exchange towards the States, placing downward pressure on the market by forcing fund managers to sell their holdings to meet demand.
UK equity funds saw outflows jump to their highest level since February 2023 in the opening three months of the year, capping off 34 consecutive months of net selling, according to data from Calastone. US focused funds meanwhile notched record inflows.
While fund managers like Waverton’s Frikkee say the view that London is undervalued is too broadbrush, scores of others disagree.
“There are many cheap listed companies in the UK. If active market participants won’t buy them, then others are clearly happy to step in and arbitrage away the undervaluation.”
Ambrose Faulks, co-manager of the UK Select fund at Artemis
“There are many cheap listed companies in the UK. If active market participants won’t buy them, then others are clearly happy to step in and arbitrage away the undervaluation,” Ambrose Faulks, co-manager of the UK Select fund at Artemis, told City A.M.
As the UK economy appears to be weathering a softer landing than many had expected, fund managers are beginning to see value in the smaller, more domestically-focused end of the market, which has been most brutally squeezed by an economic downturn and cash leaving the market.
Hoggett says quality companies can find investors wherever they list. It seems opportunistic investors on the look out for good companies at bargain prices may be taking a similar view.