European companies are turning their backs on the London and Frankfurt stock exchanges, opting instead for listings on the New York Stock Exchange and the Nasdaq.
This development is causing consternation in Europe’s financial centers. The departure of companies to New York is causing a big stir in London, where investors are alarmed about the British capital’s position as a global financial center.
The attraction of New York consists mainly of the higher valuations that stocks have there. Citigroup calculated that P/E ratios in the US are now 40% higher than those in the UK.
Also, the large trading volumes in the US make it easier and cheaper to buy and sell shares. This has led to global competition for share listings now that IPOs are rare due to turbulent market conditions.
Companies end up flocking to where their financing needs can best be met. According to Cassandra Seier, who, as NYSE’s head of international capital markets, is responsible for attracting foreign companies, one of the reasons that the NYSE and Nasdaq are more attractive is the oversight of the US stock market watchdog SEC. The oversight is known to be fairly strict, making investors more confident in companies listed there.
The departure of companies to New York also affects Europe. The complex patchwork of European stock markets is a huge barrier to building the bigger and better capital markets the European economy needs. The regulatory burden is not necessarily heavier in Europe than in the United States, but the differences between European countries still make the region a difficult choice for companies.
According to investor group Eumedion, the US is the most liquid market, where investors’ risk appetite is also higher than in Europe. Together with the flexible listing rules, this makes the US very attractive. This is especially true for high-risk sectors such as technology and biotech.
Dwindling Market Share
The British government wants to make the London Stock Exchange more attractive by increasing opportunities for unequal voting rights listings and simpler prospectuses. Also, founders of tech companies are only allowed to sell a small pick of shares in an IPO.
However, the deeper problem in the City is the absence of a domestic investor base. Since the turn of the century, the percentage of British shares held by British institutional investors has fallen from half to 4%.
Missing out on national semiconductor pride ARM is especially sensitive in London. Shares of British American Tobacco (BAT) have been traded in the British capital since 1912. Yet GQG Partners, one of the largest shareholders, argued for a move to New York, where rival Philip Morris already enjoys a higher valuation. Meanwhile, BAT has become an “orphan in Europe,” GCG’s Rajiv Jain told FT. “The shareholder base is gone, and it doesn’t make sense to stay there.”
Old Economy, New Challenges
Europe’s financial heart seems mainly left with companies from the “old economy,” such as miners, oil companies, and banks. Promising companies there are often picked up early by private equity due to low valuations and cheap sterling.
However, European capital markets need better coordination and consolidation to attract European companies. The complexity of European stock markets is currently an obstacle to constructing larger and better capital markets that the European economy needs. Europe must focus on making its capital markets more attractive, which can boost the European economy and help attract more talent and investment.
