The London Stock Exchange (LSE) has once again become Europe’s most valuable stock market, overtaking Paris with a total value of companies listed reaching $3.18 trillion.
This development signals a notable recovery for the UK market after a few years of underperformance, while Paris faces market uncertainties due to political factors.
Significant Milestone for LSE
This reversal is seen as a substantial achievement for the LSE, which had been trailing behind Paris since November 2022.
Back then, the LSE’s decline was largely attributed to various factors including Brexit, the fallout from former Prime Minister Liz Truss’s mini-Budget, a weak pound, and recession fears.
French Market Uncertainties
The French market has been experiencing volatility due to upcoming election uncertainties. President Emmanuel Macron has called a snap election following Marine Le Pen’s right-wing National Rally’s triumph in the European elections.
Market investors generally dislike uncertainty, and the impending election has exacerbated concerns. National Rally’s manifesto includes “unfunded spending,” which doesn’t build market confidence.
UK Political Reassurances
In contrast, both major UK political parties are making efforts to reassure market investors.
Labour, leading in the polls, aims to present itself as a “safe pair of hands.” Chancellor Jeremy Hunt has also highlighted efforts to tackle market challenges. Together, these steps have helped restore some confidence in the UK market.
Russ Mould, AJ Bell’s investment director, noted that British stocks might be undervalued compared to their American counterparts, largely due to these reassurances.
Competition with American Exchanges
A key challenge for the LSE has been its competition with American exchanges. Numerous large firms, including those based in the UK, have chosen to list in the US, increasing the value of American stocks.
The S&P All-Share index has surged by over 85% in the past five years, whereas the FTSE All-Share index has grown by less than a tenth during the same period.
While the UK index has improved since the start of the year, British stocks remain cheaper relative to their earnings compared to American stocks.
Recent Performance of the UK Index
Since the beginning of the year, the UK index has shown noteworthy improvement. This is partly due to greater clarity on interest rates, which are expected to fall.
Lower interest rates make borrowing cheaper for British companies, further boosting their stock market performance.
However, despite this progress, UK stocks are still priced lower than their US counterparts, prompting discussions about potential undervaluation.
The Sustainability of US Market Gains
AJ Bell’s Russ Mould suggested that the US market’s reliance on a few highly valued tech stocks might not be sustainable in the long term.
He also mentioned that American companies might be overvalued, while UK stocks could be presenting a buying opportunity, given their lower relative prices.
The LSE reclaiming its position as Europe’s largest stock market is a testament to the gradual recovery of the UK market amidst political uncertainty.
However, the ongoing competition with US exchanges and the undervaluation of UK stocks remain challenges that require continuous effort and strategic market positioning.