It is curious how the London Stock Exchange's FTSE 100, FTSE 250, and FTSE 350 indexes are underperforming, vis-a-vis New York's Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ, and Tokyo's Nikkei 225 and TOPIX (Tokyo Stock Price Index).
Why is this, what could be done about it and should investors invest in the LSE in anticipation of some re-rating?
SENTIMENT
With the exception of Rolls-Royce, all good results are met with negative comment. At what point will the UK's London Stock Exchange become investable to international investors?
Over in New York, investing genius Ray Dalio said this week: "The stock market doesn't look very bubbly", but Bank of America just released a new report titled: "The S&P 500 is egregiously expensive"
So who's right? The S&P has risen for 15 out of the past 17 weeks -- a feat not seen since 1989 -- the current rally is "extremely long in the tooth" and the odds of a correction are high....is now the time to shift liquidity to London?
THE INTEREST RATE CYCLE
Since 1900, equities have outperformed bonds, bills and inflation in every market for which there is a continuous history.
The majority of long-run asset returns are earned during easing cycles. The annualised return on US stocks was 9.4 per cent, 3.6 per cent for bonds, during easing cycles; compared with just 3.6 per cent and -0.3 per cent during hiking cycles. Data for the UK shows a similar pattern.
We are entering a cycle of easing interest rates at this time. Lower interest rates make borrowing cheaper, potentially boosting investment and spending across sectors. Lower interest rates would also diminish the attractiveness of fixed-income investments like bonds, leading to a shift in capital towards equities as investors search for higher returns.
In a low-interest-rate environment, businesses can borrow more, which can lead to capital expansions, acquisitions, and increased profitability.
INVESTABILITY GUAGE
As we've seen, Britain ranked third in terms of world investable equity market value - a long way behind the dominant US, and Japan too, unfortunately.
BIG CAP V. SMALL
Large firms everywhere, including the UK, are - for reasons I don't much understand - more and more outperforming their peers. It seems to be to do with big investors seeking reliable quality and profitability. Not to say that in growth cycles, small caps outperform large.
REASONS FOR UK UNDER PERFORMANCE
So why is it that UK listed companies underperform?
They are on very attractive valuations This is one reason why new companies list in New York rather than London, especially Tech, to achieve higher share price multiples to earnings and higher valuations. Building materials group CRH is one example . It moved its primary listing to the US last year, a blow to ambitions for London as a global financial centre.
UK FTSE 100 companies are international, so diversified income streams.
They pay handsome dividends, they are undervalued and we are all heading into an easing rate cycle.
EARNINGS SURPRISES
When a company publishes its results, it always also is noted the "earnings surprise", ie actual to analysts' expectations, to the upside or downside.
Well, Shore Capital notes the ratio of +ve surprises to -ve's is on the up, another reason to be cheerful, yet reactions to any misses, especially on dividends (the LSE offers income while New York offers growth) – are exaggerated.
Furthermore, the pound is expected to continue to weaken against the dollar and this should drive SP gains for companies with important overseas earnings.
HOW COULD LONDON MOVE AHEAD
So what is missing to put the LSE back on global investors' maps?
Far as I can see, it needs to be established that the UK is not heading into a recession ... on the contrary that earnings are improving. If that can happen then there should be strong capital inflows into UK equities; and the observation that share prices up more in an easing rate cycle will be proven once again.
It would also help if big investors like banks and insurance companies could invest their customers' money in the UK rather than sending it overseas. And the UK PM Rishi Sunak, with his finance background, is seeing to these points.
WILL THE LSE PERFORM?
The LSE is a problem. I dont think I have seen a positive story on the LSE for a long long time. It's all doom and gloom. Why is it fairing so badly?
No tech sector - that's where the big gains are, other markets like New York are far more attractive.
The poor state of the UK economy.
The dismal state of political leadership and direction- how many prime ministers in a few years?
A perception that returns from the uk will be lower than say the USA.
How's that for a short list. Someone said the LSE is going the same way as the Irish stock market!! The stat.s show British institutions and individuals would rather invest elsewhere than the LSE.
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