A leading City stockbroker’s economist has issued a warning that London’s market is “structurally broken,” with companies trading at a 20% discount compared to their international counterparts.
Simon French, the chief economist at Panmure Gordon, pointed out that diminished investment in UK stocks has led to a self-perpetuating “doom loop,” resulting in their significant undervaluation.
French expressed concern that the issue was not addressed in the Autumn Statement, suggesting that a resolution might not be imminent.
He noted that the new set of regulations introduced by Chancellor Jeremy Hunt, termed the Edinburgh reforms, seem to recognize this problem. However, the French believe these measures are insufficient.
He commented, “We are in a difficult situation, and it requires some quite radical reforms. The long-term underperformance of the UK market has, in my opinion, become a self-fulfilling prophecy.”
“The individuals managing pension investments are observing its underperformance, leading them to reduce their allocation to it, creating a problematic doom loop,” he explained.
These remarks reflect the recent concerns voiced by several FTSE 100 CEOs, who have appealed to Mr. Hunt to break the detrimental cycle of decline in Britain’s stock market.
Notably, Noel Quinn, CEO of HSBC, and Helge Lund, Chairman of BP, were among those who signed a letter from the Capital Markets Industry Taskforce. This letter emphasized the need to enhance the appeal of London markets to investors.
Mr. French identified regulatory constraints on pension funds’ asset choices and the rising allure of U.S. tech stocks as contributing factors to the issue.
“Over the past two to three decades, regulatory actions have progressively discouraged pension funds from investing in UK equities,” he stated.
“Simultaneously, retail investors have been drawn to companies like Tesla, Amazon, and Google. This has created a perfect storm.”
Mr. French’s comments come at a time when there are increasing concerns that the market for small and medium-sized companies in Britain is diminishing, potentially affecting London’s status as a global financial center.
This issue was highlighted recently when Mars, a US conglomerate, acquired UK-listed Hotel Chocolat for £543 million. This acquisition is a recent example of the growing trend of international buyers targeting undervalued London stocks.
Peel Hunt, an investment bank, also issued a warning last month that the number of companies leaving London’s markets is surpassing those joining.
