The stark challenge facing the London stock market

The biggest selling point for the UK stock market in recent months has been its slow, steady, boring nature. This is a quality that should not be taken for granted.

The era dominated by whizz-bang, US tech-led stocks is fading. Sure, it made a good shot at reasserting itself in the final months of last year, and indeed in the opening month of this year, as investors thought they spotted signs that developed-market inflation was in retreat and central banks would cut them some slack.

But it has hit its limit yet again. In a repeat of the pattern we have seen over and over for the past year, the latest data releases suggest that — surprise, surprise — inflation is rather sticky and central banks will keep up their efforts to hose it down with rate rises.

German central bank president Joachim Nagel — a hawk straight from central casting — said this week that, finally, this has sunk in to fund managers’ brains. “There was maybe this over-optimism,” he told Bloomberg. “I believe now that the markets . . . really got the message.” We have seen this movie before, often, but maybe this time he is right.

As he suggests, market prices do clearly reflect a change in the mood. The US S&P 500 index has dropped more than 4 per cent since the start of February and the Nasdaq Composite has dropped 5 per cent since its early-February high point. Yields on 10-year German government bonds stand at their highest point since 2011.

This is not the kind of environment where stocks linked to unprofitable companies thrive. It is a much more supportive environment, however, for more staid equity markets in Europe, among them, arguably the most stodgy of them all — the UK’s FTSE 100, which is up by more than 6 per cent so far this year. It struck a record high in late February and remains close to that point now.

Boring is back, and boy, has the UK got some boring to sell you, and at a cheap price too.

A flick through the biggest companies in the FTSE 100 is not exactly a thrilling ride. The list starts well enough — pharmaceuticals powerhouse AstraZeneca sits around the top of the list with its £168bn valuation, and it is hard to argue against the innovative muscle of drugs companies in the post-pandemic era.

But unless you are a big fan of oil and gas companies or miners — not a huge draw for today’s sustainability-minded global asset allocators — or of banks, the rest gets pretty dry pretty quickly. This is great for patient investors, less so for those seeking rapid growth.

While, for better or worse, around a quarter of the value of the entire S&P 500 index comprises tech companies such as Apple and Amazon, the FTSE 100 offers just a 0.7 per cent weighting in the technology sector. British American Tobacco still ranks in the top 10 companies in the UK index.

This mix has been recognised as a problem for years, sparking well-meaning efforts to bring more “new economy” companies to the UK, or to get them to list here once they are founded.

Exactly two years ago, the UK government published Lord Jonathan Hill’s listing review, replete with hand-wringing over the “stark picture” on stock market launches and the “stiff competition” with other financial hubs.

“The most significant companies listed in London are either financial or more representative of the ‘old economy’ than the companies of the future,” Hill said, with a clutch of recommendations including the introduction of dual-class share structures, a “rebranding” of the market and greater efficiency to the process of going public.

This week, though, a significant new crack developed in London’s efforts to reinvent itself for modern markets, when CRH said it planned to ditch its UK listing in favour of New York. My colleague Ian Smith described this move by the world’s biggest building materials company as a “concrete example” of London’s woes. (Please feel free to email him about the quality of this joke.)

That itself is bad enough, but it came after Ferguson, a plumbing and heating supplier, also left the FTSE. Worst of all, as the FT reported at the start of this week, even oil major Shell — the UK’s biggest listing — has considered leaving.

What this all means is that not only is the UK struggling to attract shiny, exciting and successful initial public offerings, but it is increasingly struggling to cling on to the more sober companies that cautious investors know and love in challenging economic environments too. This should be a wake-up call.

Richard Marwood, head of UK equities at Royal London Asset Management, argues that emulating spicier markets by degrading required governance standards is not the answer. He is already excited about plenty of UK companies. But local investors, including pension funds, must be encouraged to put more money to work in the UK and rekindle the virtuous circle of livelier liquidity, higher valuations and more listings.

“I’m not altogether despairing,” he says. “Sentiment is improving a little bit. But let’s not race to the bottom in standards to get businesses here, let’s improve the depth of the liquidity pool.” Lord Hill banged this drum back in 2021. It might just resonate more now.

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