Is London Stock Exchange Group’s dwindling membership signaling a dynamic shift in capital and security markets? It’s a question The Telegraph posed this past February.
The London Stock Exchange Group (LSEG) has hit a significant low point: the number of companies listed decreased by 25% in the past decade, with 2022 alone experiencing a 6% decline, shrinking the total number of constituents down to 1,836. This is a stark contrast to the 2,448 firms listed in 2013. But where are London-based companies flocking to?
New York’s capital markets and tech hubs have lured many constituents to the US, as M&A activity is driving exits from the UK market while new listings struggle to gain traction, based on a recent analysis by brokerage firm Peel Hunt.
And while London’s decline in publicly-traded companies is not a unique experience (e.g. the US boasted 6,000 listed firms in the mid 1990s—a number that’s been has halved as of October 2021, according to McKinsey), it’s a troubling trend not just for the UK, but global markets on the whole. So what can we expect in the coming months: a steep decline into economic despair for the LSEG, or a period of recovery? Using the AlphaSense platform, we dive into answering these questions and forecast a more informed outlook moving forward.
IPOs Making a Return to UK
According to a recent story from Reuters, LSEG says its initial public offering (IPO) pipeline is “building up” following Britain’s departure from the European Union. The UK government introduced a handful of financial reforms to reaffirm the city as a financial center for global businesses—a strategy devised after several companies, including Arm Holdings, Cava Group, and Instacart, listed in the US in recent months to “chase deeper pools of liquidity.” However, this has not swayed David Schwimmer, CEO at LSEG, and his optimistic perspective on the “encouraging pipeline” of initial public offerings in London.
The LSEG exchange welcomed four initial public offerings (IPOs) since the start of the year, ushering in a pool of $371 million. Across Europe, there have been a total of 35 IPOs totaling $12.22 billion, while the US market has seen 66 IPOs totaling $14.72 billion. Hoggett notes that this burgeoning IPO pipeline comprises global companies from Asia, the Middle East, and Europe.
And with major retailer Shein turning their attention to a potential London IPO listing after being blocked from US markets, there may actually be a resurgence of activity in London’s markets. “We believe this needs to be actively addressed as the FTSE Smallcap will cease to exist by 2028 at the current run-rate,” brokerage Peel Hunt stated. By 2023, the number of enterprises within the FTSE Smallcap index, excluding investment trusts, plummeted to 114—a significant drop from the 160 tallied at the end of 2018.
A Strategic Collaboration
In December of 2022, the London Stock Exchange announced a partnership with Microsoft that would evolve the business by focusing on data services rather than struggling capital markets. Microsoft purchased a 4% stake in LSEG and signed a decade-long contract for cloud and data services. It’s a strategic yet obvious move on the group’s part for a few reasons.
According to the Financial News, equities are accounting for an increasingly smaller portion of London Stock Exchange’s revenue. While the group reported pre-tax profits of £1.2bn for 2022—up nearly 40% on the previous year—its capital market division only grew revenues by 10% and its equity revenues by just 3%.
More specifically, most revenue growth in the group’s capital market division came from Tradeweb, LSEG’s fixed income and derivatives trading platform. While many have questioned London’s claim over Tradeweb (a NASDAQ-listed company), an LSEG rep stated, “Tradeweb is majority owned by LSEG, and fully consolidated in our accounts down to pre-tax profit, entirely in line with global accounting practices. It is an important part of our capital markets division along with our equities and FX business, and is collaborating deeply across LSEG including with Data & Analytics, FTSE Russell, FX, and post trade.”
It makes sense, then, for LSEG and Microsoft’s partnership to focus on producing a comprehensive, genAI tool tailored for finance and investment professionals that enhances productivity while maintaining regulatory compliance. With the release of a series of products created in tandem with Microsoft, LSEG can claim ownership over what the partnership yields while reaping customer and revenue gains from the data Tradeweb already leverages:
“Both the data sets and data analytics products that LSEG has as well as the trust and the deep partnerships that they have across the financial services space, it really is very unique. I think we’re going to find with generative AI, as we apply it to that data platform, is only going to enable and unlock new use cases. And I think with LSEG and Microsoft partnering together, we’re really on the cusp of unlocking tremendous new potential.”
“The work we’re doing with Microsoft [is] to create value from our data using large language models and generative AI. This solution will automatically generate meeting preparation summaries, combining insights using our financial data and all the relevant content in Microsoft 365, including documents, e-mails and chats. And pilots will start with the investment banking community, eventually moving to general availability for all LSEG Workspace users.”
– London Stock Exchange Group | Analyst/Investor Day, 2023
In LSEG’s 2024 Q1 earnings report, the group shared that it was “confident of continued growth and improving profitability” with its Microsoft partnership—adding that it was on track to meet all its financial guidance from November 2023. Additional affirmation of improved performance stemmed from shareholders greenlighting buybacks and discussions of doubling Schwimmer’s salary.
This past few years has seen LSEG focus more on its data analytics and post-trade businesses, having completed four acquisitions—Global Data, MayStreet, Tora and Quantile—in 2022 alone.
Promising Performance on the Rise?
Contrary to recent gloomy headlines, London stocks have displayed resilience recently, securing a third consecutive month of positive growth, according to Reuters. The FTSE 100 index increased by 0.5%, paralleled by a 0.3% rise in the mid-cap FTSE 250. Despite both indices concluding the week with marginal losses, they sustained their upward trajectory for the month.
Likewise, anticipation surrounding the release of US personal consumption expenditure (PCE) data reignited discussions about the likelihood of a Fed interest rate adjustment later in September. It’s a turn of events that many believe will set the foundation for a prosperous market return.
Though, that’s not to say there aren’t factors challenging such optimism. Recent data revealed a rise in euro zone inflation in May, indicating the challenges the European Central Bank (ECB) still faces in controlling price escalation. Analysts foresee the Bank of England mirroring actions of the ECB with a cycle of rate reductions, predicted to occur in upcoming weeks.
Britain’s primary stock index hit a pinnacle at 8,076.52 this past April—a value that eclipses its previous high set back in February 2023. While this surge is noteworthy, it falls slightly short in comparison to the gains witnessed among other global indices. For instance, the pan-European STOXX 600 index soared by an impressive 6% in April, outpacing the FTSE 100. Meanwhile, France’s CAC 40 and Germany’s DAX have demonstrated even more robust performances, boasting gains of 7.5% and 7.8% respectively.
Prepare for the Unexpected
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Content Marketing Specialist
Formerly a writer for publications and startups, Tim Hafke is a Content Marketing Specialist at AlphaSense. His prior experience includes developing content for healthcare companies serving marginalized communities.
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