London is booming and sluggish at the same time

London Stock Exchange

Many London-listed companies are boosting their prices with high dividends and massive share buybacks.

(Photo: imago images/Xinhua)

When the Paris Stock Exchange briefly ousted London from the throne of Europe’s most valuable stock market in mid-November 2022, the British form of controlled panic was evident on the Thames. Especially since the number of IPOs has fallen more sharply than elsewhere and London did not register any new issues of more than one billion pounds last year.

With tightened lips, the bankers in the city pondered: what to do to stop the threatening decline of the financial center?

Ideas of a deregulation “Big Bang 2.0” and of London as a crypto stronghold quickly made the rounds on the financial mile. In the meantime, a brilliant boom on the London Stock Exchange has dispelled concerns that investors will be ignored for the time being: the leading index FTSE 100 has passed the magic mark of 8000 points and thus reached a new record high. London is top in Europe again.

Something that has been lost in the euphoria about rising prices is that the boom doesn’t quite fit in with the economic misery in which the British economy has been finding itself since the middle of last year. Economic growth is stagnating, inflation remains stubbornly high and has forced the Bank of England to steadily raise interest rates. That’s usually not a bottom for a stock market rally to thrive on for long.

Now it would not be the first time that the coincidence of high prices and a bad economic situation has puzzled the augurs on the stock exchanges. However, the fact that energy suppliers such as the British gas supplier Centrica or the domestic oil companies Shell and BP are reporting record profits and price jumps, while large parts of the population do not know how to pay their enormously increased energy bills, has not only caused guesswork, but also created a lot of anger.

graphic

The answer to the riddle is as trivial as it is worrying: the best performers in the FTSE 100 index do most of their business and profits abroad. This applies not only to the two energy giants Shell and BP, but also to the consumer goods group Unilever and the major bank HSBC, which is primarily active in Asia.

For these “multinationals” it is more important how the global economy develops – and not the domestic one. The fact that Great Britain is currently lagging behind the large industrial nations in terms of growth is not decisive for their business.

Global trends

Handelsblatt International correspondent Torsten Riecke analyzes interesting data and trends from all over the world in his weekly column. You can reach him at [email protected]

(Photo: Klawe Rzeczy)

In addition, many London-listed companies attract international investors with high dividends and massive share buybacks, thereby driving their prices up. According to analysts at investment platform AJ Bell, companies in the UK’s top index are expected to pay out around £80 billion in dividends over the past year and buy back more than £55 billion of their own shares.

However, the stock market boom driven by global factors and price maintenance is no reason to give the all-clear. Brexit and the associated loss of unhindered access to customers in the EU have greatly reduced London’s attractiveness for investors from North America and Asia. EY estimates that around £1.3 trillion in assets have been moved from the UK to the EU since the 2016 referendum. Even UK pension funds are now avoiding UK equities.

Purgatory for EU rules to make London more attractive again

With a “purgatory” for rules from the time of EU membership, the government in London now wants to bring London’s financial center forward again. To this end, not only are the capital regulations for insurers (Solvency II) to be relaxed, but also the strict distinction between retail and investment banking introduced after the financial crisis. And the abolition of the bonus cap for bankers should also help to make London a playground for “movers and shakers” again.

Whether this will succeed will perhaps become apparent when the Japanese technology investor Softbank announces where it intends to bring the British chip manufacturer ARM back to the stock exchange. Softbank plans to list ARM on the American Nasdaq. However, the British Prime Minister Rishi Sunak is promoting that London will also benefit from the IPO through a “dual listing”. For the stock exchange on the Thames, which is mainly dominated by companies from the “old economy”, that would be like a rejuvenation.

More: London plans “liberation” from old EU rules for banks and insurance companies

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