Shellacking: London stock market faces investors zeroing out

The story of the Pied Piper of Hamelin dates back nearly a thousand years and involves a flute player ridding the town of its rat population. Following non-payment for services rendered, the medieval character takes his revenge by enticing the town's children to follow his tune. There are numerous endings to the tale, but in most cases it doesn't end well for the small town in Germany.

So, when the chief executive of Shell this week hinted, once again, that the company could exercise an option to move its share listing to New York, London's financial press were only too happy to speculate that where Shell goes, others will follow.

Wael Sawan was saying that the London market was not performing as well as it should for Shell, and that similar energy companies, such as Chevron and Exxon Mobil, were having a better time of it in New York.

'A major issue'

In many senses he's right – shares in Shell trade at eight times earnings in London, while its contemporaries on the New York Stock Exchange (NYSE) trade at 12 times earnings.

However, Shell shares changed hands for more than £28.60 this week – in record territory for the company that has the largest market capitalisation on the London market. Shell made a $28 billion profit last year and boosted its fourth-quarter dividends by 4 per cent.

But Mr Wael wants more and so reiterated his line about exploring "other options" if the company's valuation doesn't improve by the summer of 2025.

“There are many who question whether that valuation gap can only be bridged if we move to the US,” he told the BBC last year.

But ultimately it's about investor attitudes and pools of investment, Mr Wael's predecessor at Shell, Ben van Beurden told an oil industry summit in Switzerland earlier this week, pointing to the widening gulf between European and American oil majors.

“It’s a major issue,” he told the gathering in Lausanne.

European fossil fuel companies have traditionally traded at lower levels than their US counterparts, but the valuation gap has widened in recent years as European investors have imposed tougher investment rules on themselves regarding money and carbon emissions.

As such, European companies have reinvested profits from fossil fuel activities into renewables at a faster rate than their US counterparts, much to the annoyance of those investors who were keen for big returns in a high oil-price environment.

Watershed event

But if Shell did pack its bags and move its primary share listing to New York, for many it would be an earthquake few in the City of London's financial markets would forget.

"From the perspective of London more widely, it would undeniably be a blow if the FTSE 100’s biggest stock by market capitalisation, revenue and profits, and second biggest by dividends (according to consensus analysts’ forecasts for 2024) were to up sticks and leave, especially as its dividend yield remains a key plank of the investment case for the UK equity market." Russ Mould, investment director at AJ Bell, told The National,

Richard Hunter, head of markets at Interactive Investor, told The National that not only would Shell's potential exit from London be "extremely damaging", but that it could "prompt other blue chips to follow suit, most obviously BP in the first instance, itself a giant with a market value of almost £90 billion".

Because Shell represents 9 per cent of the FTSE 100, were the oil company to make the move to the NYSE, it would be a "watershed event for the UK stock market", Ben Laidler, global markets strategist at eToro told The National.

No longer the home of mining

But would Shell really be the Pied Piper of the London stock market?

Well, perhaps, but several companies have actually already beaten the oil firm to it.

The building materials group CRH moved its share listing from London to New York last year, a move which the company said would "bring increased commercial, operational and acquisition opportunities" to the business and deliver "even higher levels of profitability, returns and cash" for shareholders.

In February, shareholders in the travel giant Tui voted by more than 98 per cent to quit the dual-listing on the London Stock Exchange (LSE) and the Deutsche Boerse in Frankfurt, deciding to have the shares trade solely in Germany. The shares celebrated with a 2 per cent jump when they opened for trading last Monday. Meanwhile, plans by Flutter, the owner of Paddy Power and Betfair, to de-list from the LSE continue at pace.

Glencore announced last year that its spun off coal business would be listed in New York, and this week the Australian hedge fund Tribeca urged the board to relocate the resource company's primary listing to Sydney, adding that the UK is "no longer the home of mining".

Companies are leaving the London Stock Exchange, but they're also not coming in the first place.

The biggest IPO in the US since 2021 happened last year when the chip maker Arm Holdings, a British company, opted to join the Nasdaq and not the LSE.

The investment malaise afflicting London's markets is hitting companies large and small. The list of delistings and firms shunning the bourse is growing longer than initial public offerings.

Last week, the Biotech company Redx Pharma said it was pulling its shares from the London Stock Exchange’s Alternative Investment Market (Aim), because it would simply be easier to attract investors as a private company.

Redx joins the growing list of British biotech companies, including Barinthus Biotherapeutics, Zura Bio and OKYO Pharma, that, for one reason or another, are shunning the London Stock Exchange.

Allocate zero

A study late last year by the advisory firm Teneo found 81 per cent of UK chief executives said the value of being listed in London had declined over the course of 2023, and around a third of them were dreaming of better share values on other markets.

Also in 2023, according to Dealogic, the value of the 19 initial public offerings on the LSE fell below $1 billion, the lowest level the tracking company has ever recorded. That meant the LSE's share of the global IPO market was less than one per cent.

Purely from an international financial investor's standpoint, the relevance of the London market has waned considerably, and the UK now represents 4 per cent of global market capitalisation, down from 8-10 per cent around 20-30 years ago, Mr Mould told The National.

"So, you can now almost ‘zero’ the UK, and allocate nothing to it, within the equity portion of a capital allocation policy, and not lose too much sleep over the risk that represents.

"That was harder to do when the market represented 8 per cent or more of the FTSE All-World index, and such a spiral can become self-fulfilling, especially when passive index trackers and Exchange Traded Funds (ETFs) are so widely used to glean exposure to an asset class, or spurn it."

It's difficult to apportion blame for exactly how the London market got to this point. Out of all 40 investable stock markets in the world, it still comes in at number three behind the US and Japan, so why are so many companies avoiding it or looking to relocate?

One reason may be that they are simply following the money.

Figures from the investment tracking firm Calastone show that British investors pulled money out of UK-focused equity funds for the third year in a row in 2023.

UK equity fund outflows surged to £823 million, their worst month since February 2023 and the 34th month in a row in which money flowed out rather than in.

Meanwhile, according to Calastone's numbers, UK investors stampeded into North American equity funds over the last four months at an unprecedented rate – since last December, UK investors have added more cash to North American equity funds than they have in the previous nine years combined: £6.69 billion compared to £6.38 billion.

"UK equities are certainly cheap, but investors worry where the growth is going to come from to drive earnings higher," said Edward Glyn, head of global markets at Calastone.

"Add a relentless narrative of gloom about the prospects for the London stock market and it’s hard to persuade anyone to hold UK-focused funds.

"Meanwhile the US earnings recession is over – profits are once again on the up and that seems to be the main catalyst driving fund inflows and higher share prices.”

Some say the make-up of the leading share index in London, the FTSE 100, does itself few favours in the current investment climate, given it is heavily slanted towards fossil fuel companies, miners and banks, with almost no big tech presence at all.

The so-called Magnificent Seven of Alphabet, Meta, Nvidia, Amazon, Tesla, Microsoft and Apple have been riding to the rescue of share growth in the US for some time. Last year Apple's stock market value was more than the top 100 companies in London (including Shell) put together.

"In a time of high excitement in high growth stocks, particularly technology shares in the US where the potential for AI has led the so-called “Magnificent Seven” to stellar returns, especially last year, the FTSE 100’s lack of obvious exposure to the tech sector has been a hindrance," Mr Hunter told The National.

"Investors chasing growth have eschewed the UK’s premier index, since its constituents are seen as being past the growth phase, and while rather more dependable, cash generative and stable, many of its companies are seen as having the potential for little more than pedestrian growth in representing the 'old economy'."

Other factors could be at play here as well, including the pound's fading importance as a global currency and Brexit.

Sterling crunch

"The British wanted it, voted for it and got it, but the international finance community remains unconvinced, judging by how sterling still trades below where it did before the summer 2016 vote, against both the euro and the dollar," Mr Mould told The National.

"The government’s casual threats to break international law in its efforts to make Brexit work could also be an unwitting deterrent to overseas investors, as rule of law is a major selling point in favour of UK equities, along with the language, favourable time zone, ecosystem of banks and an independent central bank."

3Ps of investing

At a basic level, the likes of Shell may be gazing longingly across the Atlantic simply because of the size of the markets in the US. The pools of capital are deeper and wider than anywhere else by far, and as index-linked passive investing gains momentum in the US, a company like Shell would see an automatic injection of share capital by simply joining the S&P 500.

That said, by quitting London Shell would lose its status as a big fish (actually the biggest) in a small pond.

"Fleeing your home market for the US has undiscussed costs," Mr Laidler told The National.

"You won’t be included in the local benchmark indices, for example. A big issue as passive investments inexorably rise.

"While all but the largest companies may well fall out of sight and mind in such a huge market, Shell would swap having the largest market cap in the UK for outside the top 30 in the US," he added.

So, while many analysts point out that the grass may look greener for Shell on the other side of the Atlantic, others such as Mr Mould feel the task of management is to "manage the assets to best effect, and get the best risk-adjusted returns, not to manage the share price".

Mr Wael said last year that he was ultimately "in the service of shareholder value", but some analysts feel taking its primary share listing may actually be too much of an easy option.

"A change of listing venue, while time consuming and costly, may feel relatively attractive to management versus the deeper and more fundamental business changes needed to boost returns and narrow the discount," Mr Laider told The National.

Catalyst

No one really knows what would happen if Shell's primary share listing was to set sail for the US. Certainly, it would be one of the most significant events in the City of London in decades.

But in the same way that Hamelin survived the Pied Piper, London's markets would ride out the storm, though that's not to say such a tempest wouldn't leave an enduring mark on the City's financial markets.

After all, the Pied Piper may only be a tale, but to this day Bungelosenstrasse (the street with no drums) in the town does not allow music or dancing, because it is the last place the children of Hamelin were seen before the Piper took them away.