Pick up some bargains in Britain
“I have a location that clearly seems to be undervalued,” says Wael Sawan, chief executive of Shell. The oil boss sent shock waves through the City with comments that “all options” are on the table as the FTSE 100’s biggest company looks to close a persistent valuation gap with its USlisted peers, says Hugo Duncan for This is Money. The City has faced a “string of disappointments” of late as big names move listings or opt to float abroad. For Shell, a £180bn business, to quit London would be a “hammer blow”.
For now, Shell is focused on improving performance rather than the cumbersome process of moving the listing, says Javier Blas on Bloomberg. Commodity firms used to regard London as a natural home, but growing “apathy” towards fossil fuels among European investors means America increasingly looks a more congenial fit. If Shell does leave, pressure would grow on BP and Glencore to follow suit, decimating the ranks of Britain’s biggest dividend-payers. Often attacked for being full of “oldeconomy” businesses rather than tech, the City now risks losing even its dinosaurs.
The trend is not Britain’s friend
Asset manager Schroders reports that the MSCI UK index is trading at a huge 47% discount to the US equivalent, close to record levels, says Robert Armstrong in the Financial Times. Such cheap stocks are tempting, but Britain finds itself on the wrong side of several of today’s major investing trends. Markets these days attach a big premium to high growth sectors such as tech, while neglecting the dividend-paying value stocks that are London’s speciality.
Secondly, large companies have been outperforming smaller ones for a while (see page 5). That doesn’t help since the average US blue-chip is much bigger than the average British one.
If stock investors don’t buy cheap British stocks, then private buyers will. Since 2014, 137 firms worth $148bn have been taken off the London market by private buyers, says Simon English in the Evening Standard. New floats are not refilling the tank: $21bn-worth of listings by UK firms have gone somewhere other than London over the past decade. Most head to New York, but those with large European operations increasingly opt for Amsterdam. The City’s insurance and bond markets have generally coped well with Brexit; the stock exchange has not been so lucky.
Stodgy companies and underinvestment by UK pension funds certainly haven’t helped, says Tom Stevenson in The Telegraph. But the political chaos that followed the Brexit referendum does appear to be the main culprit for London’s malaise. In the years between the financial crisis and the 2016 referendum the FTSE 250 moved in “lockstep” with Wall Street in total return terms. Since the referendum it has underperformed badly. Yet political passions have since calmed. Compared with many other places, “the UK is starting to look reassuringly safe and boring”. Sterling has already perked up. Wall Street looks frothy, while UK investors can enjoy large dividend yields and the promise of forthcoming interest-rate cuts. “The case for our unpopular stockmarket is compelling.”