London-listed shares are relatively inexpensive, but this has been the case for some time. What’s different about 2025 that could bring in the buyers – and close the discount on the London Stock Exchange?
According to Goldman Sachs, every sector in the UK has a price/earnings multiple that is at a double-digit discount to its US counterpart. This discount is a Europe-wide phenomenon, but the investment bank notes the gap between the UK and US is especially large.
This means the main reasons that are usually cited for the discount – the sectoral bias towards cyclical industries and a lack of world-leading technology companies – is not actually the case. When comparing like with like, UK-listed companies have valuations that are significantly lower than businesses with shares trading on Wall Street.
A shrinking London market
This valuation discount is the main reason companies are transferring their stock-market listings across the Atlantic. The latest blue-chip company to propose such as move is equipment-hire group Ashtead. It follows similar paths taken by the likes of Paddy-Power-owner Flutter, building materials group CRH and plumbing group Ferguson (formerly Wolseley). Cambridge-based microchip giant Arm also chose New York over London when it went public once more after being taken private by Japanese tech investor SoftBank in 2017.
The valuation discount also means that we look set for a resurgence in corporate activity, with British companies particularly attractive to US acquirers because of the muscular dollar and elevated equity valuations on Wall Street. Although interest rate differentials are not expected to continue to be a tailwind for the dollar, Donald Trump’s likely policy mix is expected to put upward pressure on the US currency. This adds a currency-market kicker to the valuation discount, making UK corporates look even cheaper.
M&A activity has been sluggish for many years. Businesses have endured a difficult few years and this has resulted in caution in many boardrooms worldwide. We have suffered the Covid-19 pandemic, a period of painful double-digit inflation, global trade disruptions, military conflicts and political uncertainty – with all these gloomy factors depressing takeover activity.
Boardrooms feeling more positive
However, the outlook is now showing a significant improvement. The re-election of business-friendly Donald Trump, a positive outlook for interest rates and the fact US economy remains more robust than many had expected has shifted attitudes in corporate America and the stage is set for corporate actions to move up a gear.
US small-business confidence surged to the highest level in nearly three-and-a-half years in November amid a post-Tump-election euphoria. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index jumped 8.0 points to 101.7 over the month, hitting its highest level since June 2021.
A Purchasing Manager Index (PMI) is an indicator of the prevailing direction of economic trends in the manufacturing and service sectors – and can give an insight into the hearts and minds of those running the world’s biggest corporations.
The preliminary US Composite Output PMI – which takes both the services and the manufacturing business activity into account – was released by S&P Global earlier this week. The combined figure hit 56.6 in December, a 33-month high and an improvement on the 54.9 registered in the previous month’s survey. There is no doubt that, as we enter 2025, the board rooms of US businesses big and small are reflecting this new, more optimistic backdrop.
In 2023, there was not a single blue-chip company bought out by another company.
All of this portends an acceleration in merger and acquisition (M&A) activity in the UK over the next year. In fact, its already starting to heat up. Six FTSE 100 companies had offers made over the course of 2024 – with most of these being agreed by shareholders. In 2023, there was not a single blue-chip company bought out by another company. Offers for Anglo American and Rightmove were rebuffed, but Darktrace’s acquisition by Thoma Bravo has completed and takeovers of Hargreaves Lansdown, DS Smith and Direct Line are in process and heading towards completion.
An upturn in M&A will not only be a boon for corporate financiers on both sides of the Atlantic but could also broaden equity-market returns beyond the major US tech firms to include small- and medium-sized businesses that have lagged. Despite concerns about de-equitisation and a shrinking pool of businesses listed in London, an increase in M&A activity could breathe some life into the wider UK markets as it highlights the excessive valuation discount. But please form an orderly queue.
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