According to Citigroup Inc., the record valuation difference between the US equity market and the UK equities market is increasing the amount of pressure on the companies in the UK to optimize shareholder returns through measures such as relisting abroad.
In a note dated March 6, strategists including Beata Manthey wrote that the MSCI United Kingdom Index currently trades at a record 40% discount to the US on a 12-month forward earnings-based valuation. This represents a new record low for the index.
At the beginning of February, Manthey accurately forecasted that European stocks had more space to run in terms of their outperformance in comparison to American stocks because of low valuations and muted fund flows.
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The United Kingdom is currently dealing with a wave of corporations, such as the technology firm Arm Ltd., which is funded by SoftBank Group Corp., and the European construction materials producer CRH Plc, which are relocating their principal listings to the United States.
The pattern is worrisome for initial public offerings in the UK, which are beginning to flag. Additionally, it hinders efforts to change an equity market that is too dependent on old economy sectors such as oil and banks.
This is because the London stock market is showing various signals that the country is rapidly losing its attraction as a gateway to the developed world for investors and firms. This is something that has been happening for quite some time.
The United Kingdom’s equity market has been underperforming for years, which has caused it to lose its position as the leading market in Europe. Additionally, the UK’s share of the region’s initial public offerings (IPOs) has dropped to the lowest level since 2009, and the average daily traded volume has decreased.
According to what Manthey and his team said, “years of relative cheapness have led to a declining UK equity market, and the process will accelerate to a record pace in 2022.” This is due to the fact that low borrowing rates are promoting mergers and acquisitions.
According to an analysis conducted by Citigroup, the members of the FTSE 100 Index with high levels of international revenue that trade at a discount to their US-based competitors include the construction equipment supplier Ashtead Group Plc, the energy leaders BP Plc and Shell Plc, and the consumer goods manufacturers Unilever Plc and Reckitt Benckiser.
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