London back as Europe’s largest stock market top spot

For the first time in almost two years, the UK’s main stock market has reclaimed its position as Europe’s most valuable, according to recent data. On Monday, the combined market capitalization of companies listed on the London Stock Exchange (LSE) reached $3.18 trillion, surpassing the $3.13 trillion value of companies listed in Paris, as reported by media. Although the valuations of both markets have since fluctuated and remain close, analysts view this development as significant.

They attribute the decline in the French market to election-related uncertainties, whereas the UK market is rebounding after years of underperformance. The LSE had held the title of Europe’s largest stock market until November 2022, when it was overtaken. At that time, the LSE’s performance was hindered by the consequences of former Prime Minister Liz Truss’s mini-Budget, a weak pound, recession fears, and Brexit. In 2016, the LSE was valued about $1.4 trillion more than its Paris counterpart.

Analysts note that market investors typically dislike uncertainty, and there are many questions surrounding the implications of France’s upcoming election. Earlier this month, President Emmanuel Macron called for a snap election following a victory by Marine Le Pen’s right-wing National Rally in the European elections. Susannah Streeter, head of money and markets at Hargreaves Lansdown, pointed out that National Rally’s manifesto includes “unfunded spending.” She stated, “They are not so focused on winning over the market.”

Financial markets often respond negatively when there is uncertainty about government funding sources, as it impacts bond values, which are essentially loans to the government at a market-determined rate. If investors doubt the viability of a government’s policies, bond yields tend to rise, reducing the value of listed companies. This is because higher bond yields can make government loans more attractive than investing in company shares.

Regarding the UK, Streeter mentioned that the Labour Party, currently leading in the polls before the general election, has been reassuring investors and the financial sector of its reliability. The Conservative Party is also working to gain investor confidence. Last month, Chancellor Jeremy Hunt told the Wall Street Journal’s chief executives’ council summit, “I think London’s stock market demise is massively overstated. We do have challenges, and we’re addressing those challenges.”

One major challenge for the LSE over the past decade has been attracting investors and companies considering American exchanges. Many significant firms, including UK-based ones, have chosen to list in the US, boosting American stock values and encouraging more companies to follow suit. Over the last five years, the S&P All-Share index in the US has surged by over 85%, while the UK’s FTSE All-Share index has risen by less than 10%.

However, the UK index has shown improvement since the beginning of this year, which AJ Bell’s investment director Russ Mould attributes partly to expected decreases in interest rates, allowing British companies to borrow more cheaply. Despite this, British stocks remain cheaper than their American counterparts relative to earnings. Mould suggested that investors might be overvaluing US companies and undervaluing UK ones. He also noted that the main US exchanges rely heavily on a few highly valued tech stocks like Google, Apple, and Amazon, which he doubts is sustainable long-term. “If everyone is sitting on one side of the boat, it’s going to tip over eventually,” he said.

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