Shifting Listing and UK Equity “Crisis” Market Dynamics

peachgardenpartner
Jan 23
5 min read

By Danila Zagoruiko

Executive Summary

In 2024, the London Stock Exchange (LSE) faced its most significant wave of departures since the financial crisis, with 88 companies delisting or transferring their primary listings and only 18 new entrants. This trend highlights the growing valuation gap between UK and US equity markets, the decline in domestic institutional ownership, and the strategic shift of firms seeking better capital market access abroad.

Despite concerns, the broader economic implications appear limited. The City of London’s financial sector remains strong, driven by its traditional strengths in bonds and derivatives rather than equities. Structural reforms and improved market sentiment could reverse this trend in the long term, as seen in markets like Japan.

Macro Overview

Key Indicators at a Glance

Indicator	Latest Value	Previous Value	YoY Change (%)
Number of Companies Listed	~1,500	~1,600	-6.25%
Delistings in 2024	88	30	+193.33%
New Listings in 2024	18	23	-21.74%
FTSE 100 Closing Value (22.01)	8,545.13	7,487.71	+14.12%
Inflation Rate (Dec 2024)	2.5%	4%	-1.50 pp
Bank of England Interest Rate	4.75%	5.25%	-0.50 pp
UK Equity Market Cap	3.09%	3.8%	-0.71 p

Economic Developments

Recent Events and Their Impacts

Valuation Gap: UK stocks trade at a persistent 20%-25% discount compared to U.S. equities. This is due to:

o Lower price-to-earnings (P/E) ratios across sectors.

o Limited domestic institutional support (~33% ownership compared to 80% in the 1990s).

Global Listings Shift: High-profile firms such, Just Eat, CRH and Flutter Entertainment relocated to the U.S., drawn by higher valuations and deeper capital markets.

Sector-Specific Disparities: Energy, technology, and consumer discretionary sectors, which dominate the U.S. market, see higher P/E multiples and investor interest than their UK counterparts.

Sectoral Performance

Key Contributors to Growth

Leaders in Growth:

o Energy and Renewables: Despite global pressures, UK-listed energy firms have benefited from government-led infrastructure investments.

o Defensive Sectors: Utilities and healthcare stocks remain resilient, offering steady returns amid macroeconomic uncertainty.

Underperforming Sectors:

o Technology: Tech firms struggle to attract capital due to the smaller investor base and limited valuation multiples in the UK.

o Financials: While the bond and derivatives markets thrive, equity-focused financial services underperform due to reduced trading volumes and delistings.

Policy and Regulatory Environment

Monetary Policy

The Bank of England (BoE) has adopted an aggressive stance to address inflationary pressures and stabilise the economy. Key measures include:

Interest Rate Hikes:

The policy rate has been raised to 4.75%, still marking the highest level since 2008, to combat inflation, which stands at 2.5% YoY as of December 2024.
These hikes have significantly increased borrowing costs, dampening consumer spending—especially in housing and discretionary sectors—and adding refinancing pressures for businesses.

Quantitative Tightening (QT):

The BoE has reduced its balance sheet by £100 billion, further tightening liquidity in financial markets.
This reduction has led to higher gilt yields, making UK government bonds attractive to income-focused investors while raising debt servicing costs for the government.

Inflation Management:

Inflation has eased from its 2023 peak of 10.1%, but core inflation remains elevated, driven by wage growth and energy costs.
The BoE has signalled that restrictive monetary policies will remain in place until inflation stabilises near its 2% target.

Future Outlook:

The BoE is unlikely to lower rates before late 2025, as inflationary pressures persist, though gradual moderation is expected.
While high rates weigh on economic growth, they provide stability for financial markets, particularly for gilts and fixed-income instruments.

Fiscal Policy

The UK government’s Autumn Budget 2024 aims to balance long-term investments and fiscal responsibility:

Taxation: Corporate tax is maintained at 25%, with expanded tax credits for R&D to stimulate innovation.
Public Spending: Investments include a £50 billion green infrastructure package and increased funding for healthcare and education.
Debt Management: Public debt stands at 97.2% of GDP, with public sector net borrowing at £17.8 billion for December 2024 - exceeding forecasts.

Global Context

International Trends and Comparisons

US Market Dominance: The US continues to attract global capital, with its equity market accounting for over 66% of global market capitalisation (MCSI).
European Trends: UK valuation discounts are more pronounced than in other European markets, underscoring unique challenges.

Forecasts and Projections

Short-Term Outlook (Next 6-12 Months)

Delisting is set to continue as companies seek better valuations abroad.
Inflation is expected to moderate, supporting gradual improvement in investor sentiment.

Long-Term Outlook (2-5 Years)

Structural reforms and economic stabilisation could reverse the decline in UK equity markets.
Enhanced competitiveness through infrastructure investments and innovation support.

Market Implications

Opportunities

Undervalued UK Equities:

Attractive Valuations: UK equities trade at an average P/E ratio of 11x, compared to 18x in the U.S., presenting long-term value opportunities.
Defensive Plays: Resilient sectors like utilities and consumer staples are attractive amid ongoing volatility.

Private Equity and M&A Activity

The valuation gap incentivises private equity firms to acquire UK-listed companies. Recent deals include acquisitions in the tech and healthcare sectors.
Investors positioned in sectors with strong buyout potential stand to benefit from delisting premiums.

Emerging Green Sectors:

Government investments in renewable energy and carbon-neutral technologies offer significant equity market opportunities, particularly for ESG-focused funds.

Sector-Specific Potential:

Financials: Oversold banking stocks with strong balance sheets are positioned for a rebound as monetary tightening stabilizes.
Healthcare: Demographic trends and increased health spending create opportunities in pharmaceuticals and biotech.

Limitations

Continued Delistings: A lack of confidence in UK markets could drive further exits, reducing liquidity and limiting investor returns.
Valuation Persistence: Without structural reforms, UK equities may remain undervalued, reducing their appeal to global investors.
Global Competition: U.S. markets’ dominance in attracting growth stocks poses ongoing challenges for the UK.

Equity Strategy

Focus on Value: UK equities offer significant discounts, particularly in defensive and dividend-yielding sectors.
M&A Watchlist: Companies in undervalued sectors such as tech and healthcare are prime targets for private equity.
Green Growth Potential: Renewable energy and infrastructure investments are creating new opportunities for long-term equity growth.
Diversification is Key: While opportunities exist in UK equities, global diversification remains crucial to balance risks and capture growth in outperforming markets.

Risks and Uncertainties

Risk	Potential Impact
Persistent inflation	Prolonged monetary tightening, reduced purchasing power, and higher borrowing costs.
High public debt	Debt at 98% of DGP may lead to fiscal constraints, risk of sovereign credit downgrades, and reduced policy flexibility.
Geopolitical tensions	Energy supply disruptions, trade instability and increased defense spending burdens.
Market undervaluation	Further delistings, reduced domestic liquidity, and attractiveness of UK markets.
Global economic slowdown	Lower exports, reduced investment, and knock-on effects on the broader economy.

Key Takeaways

The UK’s delisting trend highlights structural challenges in its equity markets, driven by valuation gaps, declining domestic ownership and competitive pressures from global peers like the US. Despite these concerns, the broader economic impact remains limited, as the UK’s financial sector thrives on its bond and derivatives markets.
Aggressive monetary tightening by the Bank of England has curbed inflation but slowed growth, while fiscal policies aim to balance long-term investments with rising debt pressures. Risks from geopolitical tensions and market undervaluation persist, but opportunities exist through structural reforms and enhanced investor confidence.
For investors, UK equities’ undervaluation presents long-term potential, particularly in defensive sectors, while diversification into global markets remains key amidst ongoing uncertainties. Thus, the "crisis" in UK equities is more narrative than reality, with limited direct economic implications.

Sources

· Bank of England Policy Reports

· Bloomberg: London IPOs dry out

· Curvo Equity Market Data

· Financial Times: UK Equity Market

· Goldman Sachs Research Report

· MSCI Report

· OBR: UK Treasury Autumn Budget 2024

· ONS Market Data

· The Guardian: UK Stock Market Trends