Financial services: stubborn discount marks UK stock market’s diminished appeal

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Another year, another disappointing performance for the UK stock market.

The flow of new arrivals fell even below that of drought-stricken 2022. Meanwhile, the slate of quitters grew. As well as foreign takeovers and take-private deals, more companies contemplated switching their listings stateside. The common factor was the UK’s seemingly immovable valuation discount. 

This has barely moved over the course of the year, remaining at about one-third against the all-important benchmark US market on a price-to-forward earnings basis. While US valuations are boosted by a few very highly valued tech groups, not all the gap can be explained this way.

Small cap stocks are starting to resemble an endangered species. Excluding funds, their number is down by 30 per cent in five years. Their total capitalisation has fallen even faster, notes Charles Hall at Peel Hunt. As for takeouts, 22 of the 27 bids recorded this year were FTSE Small Cap and AIM companies. Many were in sectors such as technology and health that the government hopes to promote.  

Some companies are ditching London of their own volition. Europe’s largest tour operator Tui is considering delisting from London, after a shift in trading volumes to Frankfurt.

Building group CRH moved its primary listing from London to New York in September. The strong share price performance that followed boosted the returns of activist investor Cevian Capital which backed the switch. Cevian is now calling on education publisher Pearson to follow suit. But not all companies would benefit from relisting in the US, according to a UBS study of 60 big UK companies. After accounting for differences in profitability, valuation differences disappeared in two-fifths of cases.

Multiple factors are held responsible for the London market’s malaise. Some analysts point to the Brexit vote, noting the widening of the valuation since 2016. The multi decade decline of UK pension and insurance investment in UK equities is another prime suspect. Policymakers have drawn up plans to revitalise the City of London. But progress has so far been slow.