France is challenging Britain for the title of Europe’s largest stock market

Paris is challenging London’s leadership as home to Europe’s largest stock market and eroding Britain’s post-Brexit position as the continent’s main financial hub.

The market value of all companies listed in the French capital has risen to $2.83 trillion from $1.8 trillion in early 2016, and is approaching the $2.89 trillion value of London shares, according to Refinitiv.

“This gap between London and Paris in the domestic market is much smaller than it used to be or should be,” said William Wright, founder of New Financial, a British think tank.

“This is the result of the poor performance of UK equities, the poor pipeline and performance of UK new issues and the terrible performance of sterling. This is clearly not good news for London – and Brexit plays a big part in all three.”

Stock market capitalization line chart (on Datastream overall market indices, $tn) showing that the French market has closed the gap with the UK since the Brexit vote

The narrowing gap has worried British policymakers eager to tout the benefits of exiting the trading bloc and restoring London’s post-Brexit appeal, while Paris, Frankfurt and Amsterdam freeze bits of its day-to-day activity.

London has maintained its status as the world’s leading hub for forex and derivatives trading, although its share of both markets has fallen.

But the gap it has traditionally had in equities versus other European hubs has been evaporating since the UK left the single market. More than 6 billion euros in Europe-listed shares normally traded in the city left Amsterdam on the first day of trading, allowing Amsterdam to claim the Krone as the most active stock market.

Since 2016, the year of the Brexit referendum, the dollar value of shares on the London Stock Exchange has been pressured by a fall in the pound. Sterling has fallen nearly a fifth against the dollar since January 2016, while the euro has depreciated only about 4 percent.

“Sterling has depreciated significantly since the Brexit vote, leading to a higher rate of mergers and acquisitions, with private equity investors and corporate buyers taking advantage of the UK’s valuation discount to other equity markets,” said Sue Noffke, Head of UK Equities at Schroders.

Prominent exits resulting from takeovers include Arm, Shire, SABMiller, Sky, Cobham, Meggitt, Wm Morrison and insurer RSA.

London trumps Paris by a larger margin when it comes to depositary receipts, bank certificates reflecting ownership of shares in foreign companies that traditionally make up a large part of London’s total market value. Including depository receipts, London’s total market capitalization was $6.2 trillion, compared to $3.7 trillion in Paris, according to the London Stock Exchange.

To restore its traditional leadership, the UK government aims to finalize proposals to reform the City of London in the coming months. The planned changes include optimizations the listing regime to make listing more attractive for companies.

The UK, however, has attracted 60 new listings that have raised more than $100 million over the past three years for a total of $26 billion, compared to France’s 19 listings, which Schroders says have $8 billion revenue.

“The growth in the number of new listings is a better reflection of the health of a stock market,” said Andrew Lapthorne, quantitative strategist at Société Générale.

Nonetheless, competition from Paris will intensify as fund managers rank France as the preferred European stock market.

According to a Bank of America survey of 161 investment managers with total assets of $313 billion.

The Liz Truss government’s poorly received ‘mini’ budget has severely damaged fund managers’ confidence, with those looking to be overweight the UK falling sharply from 37% net in September to zero in November.

Andreas Bruckner, a BofA strategist, said the fund managers had reduced their overweight in European energy stocks – a key sector in the UK equity market – over the past three months, moving to a net “overweight” in industrials, a sector, over the same period , which has more influence on the French stock market.

Ben Ritchie, head of UK and European equities at Abrdn, the Edinburgh-based wealth manager, said differences in the structure of the two stock markets have contributed to the changing fortunes of the UK and France.

“Performance has been challenging for some of the UK’s key sectors including banks, pharmaceuticals, natural resources and even oil companies. France has enjoyed better tailwinds as luxury goods companies perform strongly and are more invested in industrials and technology companies,” Ritchie said.

“Shareholders in UK companies are overly concerned about dividend payments, which are considered sacred, but this has led to underinvestment, while there has been a sea change in French capitalism, which is now much more growth-focused,” he added.

https://www.ft.com/content/db5d516a-4b35-4e85-8b02-4ddd73b48e0b France is challenging Britain for the title of Europe’s largest stock market

Adam Bradshaw

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