London’s Underrated Market: Reforms, Opportunities, and a Path to Resurgence

The London Stock Exchange (LSE) has faced a slew of challenges in recent years, with delistings like Just Eat Takeaway’s secondary exit underscoring its struggles. These decisions, often aimed at reducing costs, reflect a broader sentiment of concern about London’s competitive edge against global rivals like New York. Yet, a deeper dive into the market reveals that the pessimism surrounding London’s future may be overstated.

Signs of Revival: IPO Pipeline and Reforms

Despite muted activity this year—14 IPOs raising just £750 million—the market’s prospects are looking brighter. Vivendi’s planned €6–€8 billion IPO of Canal+ is set to be London’s largest listing since 2022. Meanwhile, Shein’s potential listing offers further hope, as the Chinese fast-fashion giant could bring significant attention to the LSE. These headline-grabbing listings, coupled with an anticipated wave of fintech IPOs, hint at a reinvigoration of London’s market.

Regulatory reforms have bolstered this optimism. The LSE’s updated rules, including dual-class share structures and fewer shareholder vote requirements, provide much-needed flexibility to attract high-growth firms. These changes align London more closely with New York’s corporate-friendly frameworks, giving it a better chance to compete on the global stage.

Liquidity and Valuation Gaps: Real or Perceived?

Critics frequently cite London’s liquidity gap as a disadvantage. However, the disparity is not as pronounced as it might seem. Data from Euronext shows that excluding 79 US mega-cap stocks — which dominate over half of US market turnover—the average daily trading value of large-cap stocks in New York is just 1.3 times that of London and other European markets. This suggests that the supposed liquidity chasm is largely concentrated in a select few stocks, not across the board.

The valuation gap, on the other hand, is more tangible. The FTSE 100 trades at a forward price-to-earnings (P/E) ratio of 12x, roughly half that of the S&P 500. Yet, much of this disparity is attributable to the dominance of high-multiple US tech giants. Excluding these, the gap narrows significantly. Charles Hall of Peel Hunt estimates that the London market is undervalued by 20%, creating a compelling opportunity for investors willing to bet on its rebound.

Domestic Investment: The Missing Link

One critical factor in London’s struggles is the sharp decline in domestic investment. UK pension funds have reduced their allocation to domestic equities to just 4.4% of assets, far below the global average of 10.1%. This lack of homegrown capital weakens the ecosystem for new listings and leaves smaller firms struggling to scale.

Some policymakers have floated the idea of mandating pension funds to invest more in UK equities. While well-intentioned, such a move could spark conflict with trustees and potentially distort market dynamics. A more effective approach would be to incentivise voluntary investment, such as through tax breaks or enhanced risk-sharing mechanisms. Pension funds could also play a pivotal role in nurturing growth-stage companies, helping to build a robust pipeline to replace delisted firms.

My Analysis

The narrative around the decline of the London Stock Exchange (LSE) often overlooks its resilience and evolving strengths. While delistings like Just Eat Takeaway's secondary exit highlight ongoing pressures, they do not define the broader market trajectory. London's focus on regulatory reform and innovation, such as facilitating dual-class shares, is critical to fostering a competitive environment.

In my view, the undervaluation of UK equities presents a significant contrarian opportunity. The 20% discount estimated by Peel Hunt underscores the market’s potential, particularly when global economic uncertainty favours value-oriented investments. Furthermore, the narrowing liquidity gap between London and New York (outside mega-cap stocks) suggests that perceptions of London’s inferiority are overstated.

To unlock the market’s latent value, a coordinated approach is essential. Pension funds must take an active role in backing domestic equities, especially emerging fintech and tech companies that can drive long-term growth. Encouraging IPOs like Vivendi’s Canal+ or Shein’s potential listing could serve as a signal of confidence, catalysing further activity.

The valuation discount also raises the spectre of acquisitions, with undervalued UK firms becoming attractive targets for international buyers. Policymakers and institutional investors should work collaboratively to retain high-value listings and nurture a pipeline of homegrown champions.

While challenges persist, the LSE’s story is far from one of irreversible decline. Instead, it represents a market poised for a re-rating as reforms, investor confidence, and economic tailwinds converge. For those with the foresight to act, this could mark the start of a rewarding investment cycle in UK equities.

Conclusion

The gloom surrounding the London market, while not unfounded, appears overdone. With meaningful reforms, an improving IPO pipeline, and the potential for a revaluation of UK equities, London is well-positioned to reclaim its stature as a leading global financial hub. Investors and policymakers alike must seize this moment to drive a sustainable recovery. The opportunity is there—what’s needed now is the will to act.