The UK equity market’s record valuation gap to the US is increasing pressure on its companies to maximize shareholder returns through options such as relisting abroad, according to Citigroup Inc.
(Bloomberg) — The UK equity market’s record valuation gap to the US is increasing pressure on its companies to maximize shareholder returns through options such as relisting abroad, according to Citigroup Inc.
The MSCI United Kingdom Index now trades at a record 40% discount to the US on a 12-month forward earnings-based valuation, strategists including Beata Manthey wrote in a note dated March 6. Early in February, Manthey correctly predicted that European stocks’ outperformance versus the US had more room to run due to low valuations and subdued fund flows.
The UK is dealing with a slew of companies, including SoftBank Group Corp.-backed technology firm Arm Ltd. and European building materials producer CRH Plc, that are fleeing to the US for their primary listings. The trend is ominous for flagging initial public offerings in the UK. It also sets back efforts to transform an equity market that’s overly reliant on old economy sectors such as oil and banks.
That’s as the London stock market is displaying multiple signs that the country is rapidly losing its allure as a gateway to the developed world for investors and corporations. The UK’s years-long underperformance has cost it the top spot among Europe’s equity markets, its share of the region’s IPOs has fallen to the lowest level since 2009, and average daily traded volume has slumped.
“Years of relative cheapness have led to a shrinking UK equity market, with the process accelerating to a record pace in 2022” amid low borrowing costs driving mergers and acquisitions, Manthey and team wrote.
The FTSE 100 Index members with high international revenue that trade at a discount to their US peers include construction equipment provider Ashtead Group Plc, energy leaders BP Plc and Shell Plc, and consumer goods makers Unilever Plc and Reckitt Benckiser, according to Citigroup’s analysis.
–With assistance from Sagarika Jaisinghani.
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