London’s global reach and the half a trillion dollars equity prize

By Dr Gerard Lyons

As the world’s leading international financial centre, London faces fascinating opportunities as well as some significant challenges in coming years. This is as a result of Brexit, increased international competition from other global financial centres, such as New York, and the changing face of finance itself. London has much to be positive about but it must not be complacent. UK policy makers need to remain on the front foot, vigilant and adaptive. The City should continue to take a proactive approach to maintain its position as the world’s number one financial centre. The global reach of the London stock market is remarkable, evident from where the earnings of current listed firms emanate from. In the FTSE 100, the international exposure is 66%, while for the FTSE 250 it is a still high 46%. By market capitalisation the FTSE 100 is the world’s fifth biggest stock market. But New York dominates in this area. Moreover, global competition is intensifying. One important, indeed essential and often overlooked, dimension is London’s ability to attract global listings – highlighted over the last year by the international competition to attract Saudi Aramco’s proposed listing.

It is also vital London retains the listings it already has. One potentially vulnerable area is those major companies that have a dual listing – on London and on another exchange. There are seven of them: Unilever, Rio Tinto, BHP, Reed Elsevier, Carnival, Mondi and Investec with all but Investec in the FTSE 100. These have a market capitalisation of $235 billion. Each is dually listed on another exchange, where their aggregate market capitalisation is $259 billion. The downside would be to lose this $235 billion, the upside to retain it and to attract an additional $259 billion of market capitalisation to London: a swing factor of $495 billion. A huge prize of a half trillion dollars to play for! One way to safeguard this would be for the UK Listings Authority (UKLA) to be flexible in how it interprets its rules and in the messages it sends. In an environment of intense global competition, we explain that it would be to the benefit of London if the UKLA and FTSE Russell deploy appropriate levels of discretion to ensure flexibility and continued access to the UK markets and indices such as the FTSE 100 for key international companies.

It is important London highlights its attractions, and this has to include being flexible on rules such as listings – for instance, as it has shown in its attitude towards Saudi Aramco and as it could also demonstrate in other ways, as we outline here. If the UK is to play a leading role in the global equity market village, it needs to continue to build on its approach of being an international index as this is the nexus for a wider wealth creating eco-system that a post Brexit UK should be seeking. Economic and financial change looks set to intensify further, driven by a host of factors linked to globalisation, rapid advances in technology, increased innovation and by policy and regulatory actions. While immediate attention may be on the terms of the future relationship with the EU, including a transition deal and the ability to continue to attract skilled labour, it is not only this regional component that is important. Also vital are global and national aspects too, with the City competing to retain its international cutting edge lead while doing more to service the domestic economy. This is another example of how London can be responsive and adapt speedily to optimise future global opportunities, and send a clear, positive message in the process. In the wake of the financial crisis, regulation took centre stage.

Ahead of the crisis, the regulatory pendulum was at one extreme, too light. Now the regulatory pendulum may have swung to the other extreme, too heavy, and like any pendulum it needs to settle somewhere in the middle, supporting growth while ensuring financial stability. Attention has now also swung to technology. Over the last year, the major tech firms have committed new investments to London, to make it their global tech hub, outside of Silicon Valley. Given the growing interaction between finance and technology, this is another positive. London is already in pole position to be the financial technology (FinTech) capital of the globe. Many features of the City are deeply embedded, being “Brexit proof”. That is, they will remain, regardless of the outcome of the UK-EU negotiations. These include: the English language, the rule of law; the importance of contracts; that the courts are free of political interference; the independence of institutions; and the importance of English common law across the globe. To this can be added the London vibe, and that it is the only truly global mega city in Western Europe: a place where people want to live, work and study. All of these remain pull factors for London.

The City has much to be positive about. It is the leading global financial centre and dominates with 39 per cent of Over The Counter derivatives trading, 37 per cent of foreign exchange trading, 30 per cent of international bond issuance, 23 per cent of insurance premium incomes, 22 per cent of global foreign equity trading and 16 per cent of cross-border lending. It is a leader in insurance, has a strong presence in asset management and in law and consultancy that is hard to replicate. The UK is also the leading exporter of financial services across the world, with a larger financial sector trade surplus than those of the next four leading countries. 2017 saw over 100 Initial Public Offerings on the London Stock Exchange, a year on year increase of 54%, the largest rise in Europe. The City has also seen hiring increase since the Referendum and international firms take out more office space. Yet, there is uncertainty and financial firms do not like this. Hence the powers that be – including the government, regulators and influencers – need to act to address issues and position for future growth. From a regional perspective, London looks set to remain the financial centre of Europe. The other major financial centres in Europe are niche players. They are unable to match the infrastructure, or attract the clients and market depth and liquidity that characterises the City. A key message is the City needs to play to its strengths but be prepared to adapt and change. To retain its premier status, its attitude to listing of firms needs to be an illustration of that future adaptability.

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