Back in the mid-2000s, when finance was booming and the City of London was at the peak of its powers, brokerage boss Michael Spencer joked that statues of two US politicians — Paul Sarbanes and Michael Oxley — should be put up near the London Stock Exchange. Their tough regulation of Wall Street had sent the cost of being publicly listed in the US rocketing, making the British capital, already a magnet for global money and gateway to the nascent euro area, an ideal alternative IPO destination.
Now one can imagine executives in Paris and Frankfurt mulling similar statues of Brexit architects Nigel Farage and Boris Johnson, whose mission to remove the UK from the European Union and the single market has chipped away at London’s global supremacy. As JPMorgan Chase & Co.’s boss in France put it earlier this year, the likelihood of moving even one banking job to Paris was pretty much “nil” in June 2016. French officials estimate 4,000 Brexit-related jobs have since been announced.
While there’s no simple European winner here — as UBS Group AG Chairman Axel Weber recently grumbled, the EU has many hubs but none fully able to replicate the City — it’s striking to see how recent events have hurt the UK’s standing as a global pool of capital able to beat the US at its own game. Ask a European banker where a company should list its shares today and London isn’t always the no-brainer. That’s reflected in its receding share of global initial public offerings and SPAC listings to 3% this year, from 17% 15 years ago. Something’s changed.
It’s hard to separate Brexit’s exact impact from other factors, but reasons for snubbing London often include sterling’s volatility, the poor performance of UK-listed shares and weak trading volumes on the British stock market — common gripes that have also spurred de-listings since the vote to leave the EU.
The FTSE 100 is down 7% in US dollar terms since mid-2016, worse than peers. The weight of UK constituents in the MSCI World blue-chip index has sunk. And EU regulators are holding firm on cross-border flows after Brexit, imposing new restrictions on trading with the City. That’s nudged the likes of property group Segro Plc into a secondary listing in Paris.
This isn’t a happy state of affairs for the UK, whose prime ministers have in the past lobbied foreign leaders to win IPOs for London. They’re seen as a vital sign of a healthy economy and capital market, a source of jobs and investment and they account for a large chunk of financial-services revenue (a sector that recently represented 11% of the total UK tax take). Initial share sales also trickle down to other parts of the banking business, like trading.
That’s all taken a hit. Britain is rated by global money managers as their least favorite market in surveys by Bank of America. UK equity funds saw outflows of 12.7 billion pounds ($17 billion) between 2016 and 2020, according to the Investment Association, a British trade body.
Economic uncertainty, weak performance and depressed valuations aren’t exactly great draws for companies raising capital: 2019 was the worst year ever for listings on the AIM junior market, according to The Times, with 10 IPOs down from 42 in 2018 and 50 in 2017. It’s not all gloom — this year saw online retailer THG Holdings go public — but it’s a brutal environment.
It’d be an exaggeration to say the euro zone is booming, but weak market performance and liquidity are less of an issue. Paris, Frankfurt and Amsterdam have seen an increase in stock-market trading since 2016 as London flatlines, according to CBOE data.
Even with London’s post-Brexit weaknesses, its strengths shouldn’t be ignored: In derivatives and currency trading, the City has an 80%-plus share in Europe, according to think tank New Financial. A positive trade deal before the end of the year could also help the City regain some of its lost clout, if only by steadying sterling.
But the euro zone is nibbling away at London’s market share, and the US and China that look like even more of a threat. A recent Duff & Phelps survey ranked New York the world’s No. 1 financial center above London. Looking into the future, New Financial predicts capital markets in Asia will account for more than half of all global activity by 2040.
What happens now? Europeans know they have to integrate their disparate capital markets to build on their Brexit boost, while Brits sense opportunity in markets further afield in Asia. But these are still very interlinked jurisdictions. If they don’t find a way to work together to ease the pain of separation, it’ll be New York and Shanghai putting up those statues of Farage and Johnson, perhaps with one of Michel Barnier, the EU’s chief Brexit negotiator, in between.