 Okay, hello and welcome to episode 103 of the market maker podcast where as usual I am joined by Piers Curran to talk about some of the main things in markets but more specifically there's been a big headline in regards to slightly dramatized fears for the future of London. London has fallen was my subject line in yesterday's newsletter if you follow that and the reason for that is because Softbank and the world's largest building materials group you might not have heard of them CRH they've shunned the city in favour of New York so we're going to talk a little bit about that more specifically Softbank this week rejected a London listing for Cambridge based chip designer arm despite intense lobbying from three successive UK Prime Ministers that sounds like a long time but actually it really wasn't that's one of those journalistic it's like two weeks yeah two weeks of hard lobbying in your in your mind you're thinking what 15 years they've been lobbying over three Prime Ministers no actually it was probably more like three months but beside that I think this story as much as it's super interesting acts as a good there's also elements to talk about in particular about the history of the London Stock Exchange the LSE why New York right now is seen as more attractive what can London to do to reclaim its kind of former glory so we're going to use the story of CRH an arm to kind of explore some of these key issues but before I begin Piers you were telling the story a few episodes ago about how you got spotted and stopped on a train oh yeah we're back from Birmingham so last night I was teaching a session with the Masters students on the hedge fund strategies module at UCL and I didn't get out of the building until pretty late and got back to London Bridge station so it was about half well 11 p.m. I'd say and night shift had my had my headphones on walking to my train and some guy just grabs my arm stops me hey hey hey and I was like oh here we go I was like this is all I need I just want to go home and he goes are you Anthony and I was like uh maybe who wants to know do I really want to say and uh yeah he said um he was a Loughborough student Loughborough student listens to the podcast yes and had done a finance accelerator and has said that the podcast he had learned so much it helped him land a graduate position at HSBC and investment banking love it I thought oh wow he's just I just wanted to say thank you I thought it was you and then he just went on his way and I was like I didn't even get his name ah he didn't get his name so he probably is listening she should be yeah so if he's listening that was you um please do message me find me on LinkedIn drop me a line um so our pointless ramblings they're not maybe do have some positive effect somewhere who'd have thought all right yeah well look let's jump in and maybe you could start by explaining to me a little bit about the arm story that's probably the one that's a little bit more a little bit more sexy than building materials um can I just say your headline I'm definitely a when it comes to sensationalist headlines as you well know I'm not a big fan oh yeah you loved yesterday then but I would say your headline from yesterday whilst it is sensationalist if anything uh downplays the situation rather than over exit for clickbait um I'm talking about the demise of the uh the kind of London stock exchange and the London investor scene um you know we've talked about this on this podcast then over the over the months in previous episodes but um it's pretty depressing I have to say London's decline and it's pretty epic and spectacular we'll talk about it but like with arm it's yeah it's a yet another chapter in this this what is a long-term trend and I know often people will think about yeah the long-term trend being you know maybe since over the last two decades because we'll talk about why London's decline one of them one of the absolute key factors is technology and the rise of the tech sector and the fact that London just doesn't have any arm being uh used to be or the London used to be the London stock exchanges you know kind of one single poster child uh tech stock but um but unfortunately for London um the decline hasn't just been in the last 20 years the decline that we have been on and I'll talk a bit about the history but we've been on a steady decline in London for 170 years that's how old the decline of the significance of the London stock exchange on the global standing has has been going on for anyway we'll get on to the old the old stuff later but arms you know front page news this week and so arm um obviously it's a big chip maker one of the world's biggest chip makers you'll find their chips all over the place um smartphones and all the rest of it right huge player in the global chip market uh soft bank um snapped up and bought uh arm uh so soft bank the uh that they're kind of chief the very famous Masayoshi son uh that that is a he's a he's a pretty opportunist might be a good one of the ways to describe him so basically what happened in June 2016 Brexit what happened to the pound collapsed what did Masayoshi son do stormed in and bought arm basically took arm private so that means that they buy all their shares so that they're no longer listed on a stock exchange they're no longer a publicly traded company so that you take that company back private okay delisting so arm come out of the footsie 100 you know they're not tradable on the London stock exchange anymore soft bank own all the shares okay so he stepped in and took them private in 2016 taking advantage of the collapse uh in the pound at the time um so that was 2016 right and like with all of these kind of investment firms like soft bank they're looking for you know generating a return over a few years let's say three to five years and then they're looking to flip it and and book their profit right and so soft bank have been trying to sell now for actually for a few years they've had a couple of big obstacles um along the way one being this crazy crazy saga in China so arm China which is there obviously that Chinese arm see what I did there um they had a big issue because their chief the chief of arm China basically wasn't doing a very good job so they fired him except he entirely ignored the firing order and basically took over the company as some kind of renegade CEO and he had basically took control of it um everyone in China was loyal to him and this caused a massive nightmare for months and months and months and months in the end they had to send in literally like a team of heavy security to physically remove this guy from the building um and then wrestle back control of their Chinese entity anyway this was a bit of a saga that rumbled on delaying soft banks exit because obviously you can't you know you can't go to investors and sell the company when oh hang on yeah we don't have control at the moment of one of our subsidiaries so they needed to tidy up that mess right so that got tidied up then they tried to sell it to Nvidia who's the US chip giant okay and the offer on the table um was 40 well it was a stock and cash offer right um and this was in 2020 I think in September 2020 they basically agreed the deal in principle um and the purchase was going to be part Nvidia stock and part cash but um by the time we got round to 2022 the start of 2022 the deal still hadn't been done because the regulators and not it was the US regulators it was the UK regulators it was the EU regulators basically raised serious concerns about how this would create such a dominant global chip making giant um that it would be anti-competitive and so the regulators blocked it by the way by the time they made that decision and the deal was off so that was the start of 2022 about 12 months ago um the valuation or the deal to Softbank went from being worth 40 billion in September 2022 so September 2020 40 billion that was the deal they'd agreed in principle but it was part Nvidia stock but the share price of Nvidia went up so much between September 2020 to to the start of 2022 that that deal value to Softbank went from 40 billion to 66 billion I mean the regulators kibosh did so it didn't happen but um yeah they they they were sat on a great exit Softbank bearing in mind that they bought some they bought arm for I think it was 32 billion in 2016 they almost flipped it for double 66 billion by the time we got to 2022 anyway it didn't happen regulators got involved so ever since that deal fell through so for the last 12 months there's been a bit of a battle going on because um Softbank said okay if we can't sell this to Nvidia fine we're just going to list it and we'll take it back public so we'll do an IPO and we'll list it and the whole thing is where will we list it on what stock exchange in what territory and and obviously the situation when you look at it from a global situation and the Softbank are a Japanese company you know they have no loyalty to the UK this is a bit tricky because ARM is a UK company it's based in Cambridge headquartered in Cambridge that's where it was born that's where its roots are that's where its history is but it's owned by Japanese outfit and so they're like well we have no UK loyalty where's the best place on the planet to list and the best place on the planet from their point of view is the place where they're going to get the highest price you know they're in they're an investor they're in the business of making as much profit as they can and clearly the outstanding winner is is New York and listing it on the New York Stock Exchange and just having a look at the stock exchanges in themselves to give some kind of context to some of the numbers that you are saying about this yeah the decline of Britain yeah so here's a question for you if you're looking at the major stock exchanges in the world by the market cap of the listed companies yeah nicey being the biggest yeah where would you say the LSE stands in that ranking that's a good question what about the Nasdaq that's obviously number two yeah I was going to say in terms of other countries you've got to look at Asia and the Shanghai composite number three okay so here we go the rationale is kicking in think of continents well yeah well I'm thinking well is Japan up there as well from an Asian point of view it's probably not number four but maybe so you're next number four Japan exchange group number five number five right so you're next okay then you're like okay now you're probably thinking London's going to come in um and it's probably vying I'd probably say London next but you're you're probably going to tell me I'm wrong okay Shenzhen next oh okay yeah then Bombay then who's home Bombay stock exchange oh wow right then Hong Kong stock exchange then the Saudi stock exchange no no what is above the London stock exchange well I mean according to data well that's because Saudi Aramco IPO'd right I think if you took Saudi Aramco off that I think I think that's a little bit yeah so LSE ranks outside top 10 number 11 wow okay and one of the headlines that was in circulation yesterday did actually happen last year as well at one point is that um the Paris boss was overtaken actually London and one of those one of the main things there was that um you probably would have heard of a guy called Bernard Arnaud who's the luxury good empire of LVMH and yeah I think he's the richest man on the planet now that Tesla stock has dumped well actually I think they've flipped now back in the money again on his trade but but nonetheless so hang on Tesla sold off nine didn't they sell off nine percent yesterday because oh they had their investor investor day that was just trying to do a Steve Jobs and it really didn't work quite have the charisma of the of the legend so you were talking about Aramco and Saudi and the Paris ones are fairly similar story actually so it's a little bit misleading LVMH LVMH's share price has doubled in the last five years um and that's been predominantly driven by this insatiable appetite coming out Asia really for the demand of luxury goods and that trend is likely to continue you know kind of this short-term COVID situation aside as they become more affluent as consumers they continue to purchase these goods and so on and the market cap of LVMH has got up to around the 350 mark right now as comparison 350 billion euros right yeah so what would you say the market cap of HSBC is 75 billion pounds it's actually 125 okay so it's a bit bigger what about Barclays that's smaller than HSBC so I well if you've said HSBC is 125 I'll say 100 it's 32 oh wow miles off what about Vodafone up there near the top of the footsie yeah that's going to be punchy uh 65 billion 27 okay so if you know the market cap of HSBC BP Glaxo Barclays and Vodafone that's LVMH wow okay yeah so look like yeah okay so if you check so Paris and Saudi are benefiting from an absolute behemoth a single behemoth but it still doesn't hide the fact that being being British that's just embarrassing we're not even in the top 10 I mean I've got a chart you know I've got a chart here I'm looking at it going back to the going back to 1800 okay so I've said the decline's been going on for a while in the 1800s basically between 1800 and 1850 this was during the height of the British Empire right so in terms of you know well so why why what what makes the market cap of a stock index so large and and really it depends on where's the money because the whole point of going public the whole point of taking your company and IPOing and you know issuing shares and listing on the stock market the whole point is to raise capital right the company raising capital to you know investing growth or if you're a soft bank you're raising capital where you're not you're you're kind of selling right you're you're wanting to turn you know sell that company make a profit right but it's about raising capital so where is the money okay it's like show me the money where is it and it's it used to be in Britain right enjoying the industrial revolution the British Empire we absolutely dominated and in the 18 1800 to 1850 if you're taking the total stock market capitalization of the world Britain made up 75 percent wow of the entire world okay that's where the money was then well actually that was pre-industrial revolution right so that it was yeah investing in the railways and all of these kind of kind of trends then the industrial revolution happened and the US started to kind of really start to become a powerhouse okay so some of that shifted to the US so by the time you get to 1900 the UK had about 45 percent of the global market still the absolute dominant player okay what happened then was kind of three things happened in the 20th century that kind of were the nails in the coffin for the UK number one it was World War one and World War two which happened in Europe which meant that stock exchanges got cut shut down it meant that the obviously all the money was going to fuel the war effort there was just a complete lack of capital anywhere and so the default was to just go to the US where you know they weren't as involved in the war of course they were involved but later on the war wasn't on their territory and so the US started to become that that kind of dominant player okay World War one and World War two secondly then post second world war where the US became the dominant player and look by the time you get to 1950 here right both wars are done the US is now making up about yeah about 75 percent it's kind of a complete flip by then the UK looking at about 15 percent okay so it declined from 75 percent of the market share in 1860 to 15 percent by the time you get to 1950 okay that's number one number two nail the rise of Asia okay so this is where you get Japan first and then obviously China following on from that and now you might want to say India as well okay these these big giant centers of that so there's way more capital generation in those regions as those economies evolve and become giants okay and then number three nail in the coffin the UK has just entirely missed the technology revolution and apart from arm I mean if I were to list to you the top 10 companies in the FTSE 100 okay here we go top 10 companies by market cap shell number one AstraZeneca to HSBC Unilever BP Diageo Rio Tinto British American tobacco Glencore any tech in there uh no basically the FTSE 100 is financials it's healthcare it's energy it's mining and it's dull right it's it's just not a particularly exciting dynamic you know in this day and age that they're not kind of exciting growth dynamic businesses at all so and and actually if you look at the stats the proportion of the FTSE 100 that's made up of the sector weighting of technology in the FTSE 100 index is 1.4 percent in the FTSE 350 it's 1.29 percent so it's not just up the top index in the FTSE 100 we got an issue of a lack of tech it's all the way down compare that to the S&P the S&P's tech weighting is 28.1 the Dow Jones industrial average right that's got 21.7% tech and my final stat for you Google, Apple, Amazon, Facebook, Microsoft the big five if you add up those market caps together those five companies are worth more than the entirety of the market worth of all of the stocks listed on the stock London stock exchange that's 1,964 companies are listed on the LSE those five US tech stocks are worth more than all of them I was just looking at okay so what does the UK do to stop the rot and one of the things I was that I am aware of is that people often refer right now as the UK being a fintech centre in terms of world investment which is part of this attempt to pivot I guess on this trend and I was just having a quick look so in terms of the number of companies so the UK is home to around 1600 fintech related firms and that's predicted to double by 2030 according to the government and so despite the obvious the Brexit the shrinking of the economy it is a top destination it's only behind the US so it's bigger than India, Europe, European countries and actually in fintech investment per capita as a percentage of GDP the UK is only second to Singapore right yep so I mean yeah if I was in government and it sounds like they are it's almost like I think they've just consigned themselves to the fact that look we missed the tech thing we missed the tech bubble like just just spectacularly got it wrong and it's almost like let's just write that off what's next and what's next is fintech and it's AI right that's going to be the next big multi-decade secular trend and they are right to be targeting that to try and reinvent ourselves and kind of get London back on the map in terms of a place where businesses can come to find capital and that there's capital here to be deployed and you know in the end right if you're a seller well you want demand you want demand for what you're selling the higher the demand the higher the price you're going to get and obviously if you're trying to sell your business then you want the highest price you can possibly get so where's the demand well obviously it's in the US right and so and actually one measure on that in terms of the valuation differential so we I mean we've talked about ARM right but you mentioned CRH who are in the news this week as well and they're the big building materials company they're worth about 30 billion pounds sterling at the moment and they're listed on the LSE but they're the bulk of their profits are actually generated in the US as a business and they're benefiting from things like Joe Biden's infrastructure investment plan and so on right they're all over that but they're looking to just jump out of the UK and go and list in New York instead and one of the main reasons other than these days as their business has grown multi-nationally more revenue is now generated in the US than anywhere else so you could say that in itself would be a reason to shift focus across to the US but if you check out the valuation gap so basically right now CRH trades at 13 times their price to earnings okay so that's a 13 X PE ratio on the London Stock Exchange if you look at similar companies in the US they're trading on the New York Stock Exchange with evaluation at 25 times PE so basically CRH if they delisted in London and listed in New York would basically double their value overnight so when you put it in those terms it's like well why isn't everyone well why isn't everyone doing it and there are others right and there's smaller companies you might have heard of there's a company called Ferguson this is a big plumbing and heating supplier they used to be called Walsley which maybe is a name you would be familiar with there's a newer company called Flutter which is a big gambling company their FTSE 100 they're pushing aggressively into the US now they're looking for a secondary listing in New York so secondary listing is where you don't delist in London and then relist somewhere else so you basically keep your London listing and then you you have a second one simultaneously in parallel somewhere else Flutter are looking to do that which you would thought is the first step towards them you know fully going New York Stock Exchange and then finally and most worryingly because who's the most valuable company of the whole lot in the FTSE 100 Shell and apparently according to the FT earlier this week Shell's top executives are exploring moving the company to the US so if there's no way that would happen I mean Shell is by far and away the largest company so at the moment okay how do you stop it you stop it by just putting a big bandaid on the problem and you do that by basically this whole tax that they've put this energy like profit surplus tax that came off the back of so the first thing I'd do if I was Rishi yeah I'd be like okay Shell gets some kind of other concession which basically is reducing the fee that they pay to keep their board shareholders happy in the short term to let the this wash over and then whilst so that's the quick fix to stop any irrational decisions that happen at Shell and then you need to start talking about more like regulatory and licensing all these different types of things where we're out of the EU but that takes time that's the problem so you need to like wouldn't it be wouldn't it be a bit of a political own goal though if he's just steps up and says uh right guys you know what you know those like that windfall uh yeah but you know what Shell here you go you can have your money back right so that's when the spin doctor goes to work it definitely is not framed in that way it's done through quite a complicated legally worded yeah way that the normal Joe public just won't even register and yet they'll siphon off billions on the back of it and then that's this is how the world works right in terms of they cannot afford to lose such a powerhouse like that the game's over at that point because what other companies will just jump ship as well I mean some of the other things here the other thing was apart from relisting somewhere else was company takeovers and being taken private yeah well right so there's the extraction out of companies particularly who are the companies that people want to buy high growth ones that have real potential they're the ones that people want to buy so uh viva micro focus um avast which is a cyber security company obviously really boom during the pandemic yeah they all got taken out and these were all potential again semi technology some of them ones that they would have staked a lot of hope on to to pick up some of that gross potential in the exchange that have just gone so as much as it's like a there's two leaks here yeah that needs plugging at this point and the things I read that I know you you mentioned before about Jeremy Hunt and some plans so they've looked at changing listing rules we've just said it already though the regulatory change happens at a snail pace I think that's probably largely a problem for a lot of these deal making like you said you wait like softbank 18 months later then the share price can move deal structure can change and yeah things can look very different so yeah the listing rules in the UK they've talked about differences for dual class shares SPACs making that more accessible reducing free floats things like that um but I guess ultimately the over regulation side of things is is ultimately key I mean one of the things I saw as a stat was companies listing in London has dropped 40 percent since the global financial crisis in between 2015 and 2020 in terms of the world IPOs every every IPO that happened in the world in the five-year period from 2015 to 2020 the UK attracted five percent yeah it's just as I said it's embarrassing I mean also stuff like you you gave me a stat which I was blown away by the trading volumes on the FTSE 100 so it's still the same 100 companies that you can trade right but if you go back the kind of average daily volume um in 2007 was it you that gave me this stat did I find it somewhere else the average trading volume in 2007 was like 14 I think it was um I lost I've lost the stat now I think it was like 14 million a day okay whereas the average trading volume now is four million uh yeah the daily average volumes have dropped like yeah sort of it's what yeah they dropped like 70 percent so the average daily trading volume on the FTSE all shares index is the equivalent um to about four billion pounds in February this year compared with nearly 14 billion in the same period in 2007 right it's a pre-GFC there's just yeah I mean the money's just not there um so yeah we've got a massive issue and I think one look you need all of these things to happen simultaneously you need big regulatory overhaul like brave you know big change but of course that comes with risk so there'll be massive pushback against that you know the global financial crisis it was only 15 years ago right so a lot of this regulation was put in place to avoid that ever happening again well here we are 15 years later and you know the clear side effects of that are now for all to see so how much of that regulation do you roll back in order to reverse that trend but then you know opening the door for more crises in the future perhaps so you've got a bit of a double-edged sword there but definitely the long long long-term play to try and be a much bigger global player in the next big you know multi-decade you know secular trend of AI and then kind of fintech specifically because the financial financial sector has always been the biggest sector in the UK well I say always for the last whatever 50 years right and so you know marrying together technology and the financial sector you know makes sense for the UK so we can get that right I think that's that would be if that strategy can be deployed effectively I think that's the only way back regulatory changes sure that can help along the way but in the end you just need money though that's why you need capital and that I don't see how we're ever going to compete with the likes of the US I mean ever given the size it's just so spectacularly bigger remember we can get back into the top 10 and the rate of change happening obviously even faster outside of US and China yeah and subsequently will be in the decades to come in both India and probably Africa and come oh yeah Nigeria Nigeria for sure yeah they're coming Indonesia yeah the other area apart from you know fintech blockchain these types of things regulatory framework changes was a research paper I read I would say I read I pick up a Cambridge research paper from the PhD students and I'm like 250 pages I know exact man for the job chat GPT you just summarise that 200 page doc into chat chat GPT translated into layman's terms please and 200 words and on the other side it also talked about becoming a sustainable place for ESG investing socially responsible investing essentially could be an avenue to pursue alongside the fintech approach and be known for that yeah in those areas because I guess when it comes to the socially responsible side of things I'm just thinking off the top of my head but when you talk about China India Nigeria yeah hard I think for them in their governance alarm bells right so what you need is the opposite you need political well I was going to say political stability that would be incorrect to say for the UK but relatively you've probably could still claim that obviously infrastructure you know all these different things regulatory oversight right so I think this could be also a good direction okay so the the future's bright is what you're saying it's just the present is an absolute hell zone but the future looks good let's see yes okay I mean I'm half Chinese so I'm I'm I'm covered all right good stuff we'll end it there so thanks very much peers and everyone for listening we'll be back again same time next week so enjoy your weekend or whenever you listen to this episode and take care yeah have a good weekend