Have we reached peak USA?

One issue which continues to bedevil the UK market is the number of firms who are considering switching their main listing from the London Stock Exchange, usually to New York, and the potential newcomers who are opting to float Stateside rather than on this side of the pond. This is leading to much handwringing and comment that London is in decline as a financial centre, as well as proposed reforms from the London Stock Exchange to ease its listing requirements and by implication lessen investor protections.

It is hard to see how increasing the risks facing advisers and clients can help the London market over the long term, as the authorities prepare to admit firms without even three years of accounts or let related party transactions go through on the nod without a shareholder vote. This, it could be argued, means the Main Market increasingly comes to resemble the junior AIM market, whose own boom in new issuance spawned more than one scandal and led in turn to tighter regulation and a less laissez-faire approach in the early 2000s.

AIM tightened its rules after a boom in new issues in the early 2000s

Source: London Stock Exchange

“Loosening listing rules may help advisers, brokers and lawyers (as well as sellers of the paper) make a quick buck, but whether this creates a thriving environment for advisers, clients and their chosen fund managers as potential buyers of newly-listed stock remains to be seen.”

Loosening listing rules may help advisers, brokers and lawyers (as well as sellers of the paper) make a quick buck, but whether this creates a thriving environment for advisers, clients and their chosen fund managers as potential buyers of newly-listed stock remains to be seen. It seems doubtful, for as John Maynard Keynes once tersely noted, “When the capital development of a country becomes the key product of a casino, the job is likely to be ill done.” Thankfully, advisers and clients will have fund managers to help them negotiate any regulatory change and associated change in the risk profile of the London market.

But there is another potential issue which investors should ponder, as ARM, CRH, and Flutter Entertainment consider following in the footsteps of Ferguson and decamping from London to New York, and that is valuation.

Matter of motive

“According to analysts’ consensus estimates, Standard & Poor’s and FactSet, America’s S&P 500 index trades on around 20 times forward earnings for 2023 and 18 times for 2024. The FTSE 100, by contrast, is currently afforded forward price / earnings (PE) multiples of 11.5 times and 11.0 times, respectively.”

According to analysts’ consensus estimates, Standard & Poor’s and FactSet, America’s S&P 500 index trades on around 20 times forward earnings for 2023 and 18 times for 2024. The FTSE 100, by contrast, is currently afforded forward price / earnings (PE) multiples of 11.5 times and 11.0 times, respectively. What stock-and-options laden executive would not consider switching their listing if it offered the prospect of a near-doubling in rating and therefore potentially share price?

Advisers, clients and fund managers may therefore be tempted to tag along for the ride, but they must consider the implications. Why is the shift taking place? If it is because the bulk of the assets are there, or the bulk of the employees, then it makes perfect sense, for reasons of managing currencies, reporting, and making stock and dividend payments to staff and shareholders as efficient as possible from a tax and currency point of view. It may provide a currency for acquisitions. These all may help support and enhance the competitive position of the business, which is ultimately what the investor buys into when they acquire stock.

“If the vendor is getting a higher price, then the implication is that there is less on the table for the adviser, client and appointed fund manager as the buyer.”

But if it is just a matter of financial engineering and hoping for a higher rating, then the benefits are potentially more ephemeral. And if the firm is listing in one place rather than another simply so it can get a higher earnings multiple and the vendor can sell the stock more expensively, in whose interest is that? It may help the vendor, as in the case of Softbank with ARM, as the Japanese technology incubator looks to raise cash and prove it is not an indebted mess that just got lucky with one early-stage investment in China’s Alibaba. But if the vendor is getting a higher price, then the implication is that there is less on the table for the adviser, client and appointed fund manager as the buyer.

Relative values

“The S&P 500’s market cap is near its all-time high relative to that of the FTSE All-World. The last time it was this high, at roughly 60%, was in the early 2000s. The US stopped outperforming and started underperforming, weighed down by a valuation that proved unsustainable.”

Executive teams and investors alike should also consider another issue before they hitch themselves to the momentum of the US equity market. The S&P 500’s market cap is near its all-time high relative to that of the FTSE All-World. The last time it was this high, at roughly 60%, was in the early 2000s. The US stopped outperforming and started underperforming, weighed down by a valuation that proved unsustainable as the technology, media and telecoms bubble burst. Indeed, it already looks like the US is gently underperforming other equity markets, almost unnoticed.

The S&P’s market cap stands near all-time highs, relative to the FTSE All-World

Source: Refinitiv data

The NASDAQ’s performance relative to the S&P 500 stands near all-time highs

Source: Refinitiv data

Within that context, the tech-laden NASDAQ has undeniably outperformed the S&P easily for many years. But its relative rating is now also just coming off an all-time high, even as most commentators continue to champion the sector. Executives – and investors – looking to piggy-back US tech stock momentum in search of a pay day should perhaps bear this in mind, just in case they hook up with something that is losing pace, rather than gaining it.

Past performance is not a guide to future performance and some investments need to be held for the long term.