UK investors need to start allocating more capital to domestic stocks or London risks seeing more companies relist abroad or be taken private, according to Goldman Sachs strategists.
“More UK companies are talking about moving their listing to the US,” strategists led by Sharon Bell wrote in a note to clients on Friday. “In order to stem this migration and reduction in equity supply, there would need to be more allocation to equity by UK-based capital.”
Just this week, FTSE 100 constituent Ashtead Group announced plans to move its primary listing to the US, where the construction equipment rental firm derives most of its revenues. It joins other blue-chip UK companies like construction materials group CRH and Flutter Entertainment in shifting their primary listings overseas.
London-listed companies trade at a steep discount to their US counterparts on average based on forward price-to-earnings ratios, according to Goldman’s calculations. While European stocks also lag, the gap is more pronounced in the UK, the strategists said.
The discount is largely due to a lack of investment by domestic pension funds and households in UK companies, according to the strategists. Only one third of the country’s equity market is in the hands of local investors, compared with more than 80% in the mid-1990s, they wrote.
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“Indeed, UK equity supply is shrinking both via a lack of IPOs and a rise in buybacks/take-privates,” the strategists wrote.
This year, London has fallen behind bourses in emerging markets like Malaysia and Oman in global IPO rankings, with only about US$1 billion ($1.34 billion) of capital raised from domestic listings. Meanwhile, firms trading in London are being bought out and removed from the stock market at the fastest pace in more than a decade.
That said, it’s not all gloom and doom in the UK listings market. Vivendi’s pay-TV unit Canal+ is poised to start trading in London next week, while fast-fashion giant Shein has been weighing a London IPO. UK equity funds recorded their first net inflows in more than three years last month.
But more “material policy action” is needed to boost investment in UK equities, the strategists wrote. Plans to merge local pension schemes could help, but “much depends on their willingness to take risk and allocate to UK equities”, the analysts wrote.
