The (s)hare and the tortoise, how the “boring” LSE is seeking to return to glory as a dependable powerhouse for investors.

In recent years, the London Stock Exchange (LSE) has been overshadowed by its global competitors such as the NYSE, Tokyo Stock Exchange, Euronext and particularly the NASDAQ, which has surged ahead during the AI explosion of 2024 as the home of the mega-cap technology stocks.

The LSE, while historically a cornerstone of global finance, making up more than 5% of the MSCI World Index (large and mid-cap representation across 23 Developed Markets) in 2010, has struggled to keep pace with the shifting dynamics of global capital markets, having now shrunk to a mere 2%. High-profile listings have also dwindled, with many companies choosing to raise capital abroad.

Key factors responsible for the recent underperformance of the UK market are as follows:

• The rapid growth of technology and innovation sectors, particularly in markets like the NASDAQ, where its ecosystem of venture capital, private equity and investor appetite for tech-driven growth has driven a surge in activity.
• The complex regulations of the LSE and “burdensome” listing requirements which have deterred companies from listing here in recent times. The framework has become overly complex and is particularly restrictive to companies that seek to innovate and grow.
• The contrast with other markets that are nimbler and better suited to fast moving industries, resulting in a steady outflow of companies like ARM and Flutter (parent company to Paddy Power) to the New York Stock Exchange and beyond.
   

In response to these issues, the FCA has prepared a comprehensive reform package to encourage long term, sustainable growth. Initial reforms have already been implemented, with new listing rules having become operational on July 29th, 2024. These aim to simplify the regulatory environment and make it easier for companies to list and raise capital in the UK. Other areas that are being reformed include:

• The shift toward a “disclosure-based regulatory regime” which will allow investors to make their own informed decisions, instead of being constrained to a one-size-fits-all framework. This is particularly important in the modern investment landscape, where investors are increasingly making decisions across borders and exchanges.
• Addressing the current time-consuming prospectus requirements. Under the new framework, companies will still need to produce a prospectus for their IPOs, but the requirements will be significantly reduced for further share issuances. This has the aim of allowing companies to raise capital more efficiently.
• The addition of the Private Intermittent Capital Exchange System (PISCES), which will allow growth companies to access new sources of capital whilst remaining private. Allowing them to scale without the need for an immediate public listing, creating a smoother path to market for innovative firms.
• The creation of the Digital Securities Sandbox, which provides firms with the opportunity to test new technologies for trading and settlement in a live regulatory environment before making changes on a permanent basis.
   

As Sarah Pritchard, Executive Director of Markets and International at the FCA, noted in a recent speech, success will not be measured in days, weeks, or even months, but in the sustainable growth of UK capital markets over the coming years.

Could this steady, long term view help save the London Stock Exchange from its recent decline? Investors seem to think so, as all over the world they are beginning to accept the reality that the fastest rising US listed stocks simply cannot maintain the blistering growth that we saw in the first half of this year, when stocks such as Nvidia rose by nearly 200% between January and June.

Evidence is building that the US economy is faltering, with a slower expansion of the job market, and the increased potential for interest rates to be lowered. This slowdown is already being reflected in the S&P 500 and the NASDAQ in particular, with all the big tech companies recording a share price decline in Q3 2024 and Nvidia down some 25% since June. 

Goldman Sachs even encouraged investors to “Buy British” last week, making the case for UK equities which it views as currently inexpensive, with the potential to offer high shareholder returns from the long-term growth planned by the FCA.

Part of the reason the UK is seen to be comparatively “cheap”, is that UK institutional investors have increasingly shunned their domestic market in favour of higher returns abroad. UK pension fund and insurance companies now only allocate 4% of their assets into UK stocks, down from over 50% in 1990.  

If we combine all of this information together, it paints a hopeful picture for the London Stock Exchange. Whilst other markets have benefitted more from the recent tech boom, the slow and steady LSE hopes to provide a safe and dependable environment that investors can rely on long into the future.