Image source, Getty Images
- Author, Mitchell Labiak
- Role, Business reporter
-
Data shows Britain’s main stock market has regained the title of Europe’s most valuable for the first time in almost two years.
The total value of companies listed on the London Stock Exchange (LSE) reached $3.18 trillion on Monday, surpassing the $3.13 trillion total value of Paris-listed companies, Bloomberg data showed.
Both valuations have since shifted and remain close, but analysts describe it as a milestone.
They say the French market has collapsed due to election uncertainty, while the UK market is recovering after several years of underperformance.
Analysts at the time attributed LSE’s performance to the impact of former Prime Minister Liz Truss’s mini-budget, a weak pound, recession fears and Brexit.
The LSE was worth about $1.4 trillion more than its Parisian rival in 2016.
Analysts say market investors generally hate uncertainty – and there are many questions about what the president’s French snap elections will mean.
President Emmanuel Macron called early elections earlier this month after a victory for his rival Marine Le Pen’s right-wing National Rally in the European elections.
However, Susannah Streeter, head of money and markets at Hargreaves Lansdown, suggested Le Pen’s manifesto contains “unfunded spending”.
“They’re not as focused on capturing the market,” Ms. Streeter says.
Financial markets often react poorly when they do not know where the money for a government’s commitments will come from.
This is because it affects the value of bonds, that is, money that investors lend to the government at a rate agreed upon by the market.
When investors believe that a government or potential government’s policies are flawed, bond yields, known as yields, tend to rise.
This then hurts the value of publicly traded companies because when bond yields are very high, investors can often make more money by lending to the government than by investing in a company’s stock.
Looking to Britain, Ms Street added that the Labor Party, which is currently leading in the polls ahead of the UK general election, has sought to reassure investors and the city that it is a “safe pair of hands” . .
The Conservative party has also tried to convince investors of its approach.
Chancellor Jeremy Hunt said at the Wall Street Journal CEOs’ Council Summit last month: “I think the demise of the London stock market is being greatly exaggerated.”
“We have challenges, and we will meet those challenges.”
One of the biggest challenges the LSE has faced over the past decade has been pitching to investors and companies tempted by US stock exchanges.
A number of large companies, including those based in Britain, have chosen to list in the US rather than in Britain.
This has driven up the value of US stocks, which in turn encourages even more companies to go public there.
The S&P All-Share index, which tracks the value of every publicly traded company in the US, has risen more than 85% in the past five years.
The equivalent FTSE All-Share index is up less than a tenth over the same period.
However, since the start of this year, the UK index has recovered, which AJ Bell investment director Russ Mold says is partly down to clarity on interest rates.
They are expected to fall at some point this year, meaning British companies will be able to borrow for less money.
Despite this, UK shares are much cheaper than US shares relative to their earnings, and Mold suggests investors may be overvaluing US companies and undervaluing UK companies.
He noted that the major US stock exchanges are heavily dependent on a handful of highly valued technology stocks, including Google, Apple and Amazon, but did not believe this would be sustainable in the long term.
“If everyone is on one side of the boat, it will eventually fall over,” he said.