Signs of UK-listed firms narrowing valuation gap after record FTSE run

New hopes that London shares could be on their way back in fashion by the summer emerged today, as the latest surge in London shares and signs of a US tech slowdown helped narrow the valuation gap between the US and UK.

But City experts warned that more needed to be done to keep driving interest in UK stocks. 

The FTSE 100 hit another all-time high today in early trading, after a long spell in the doldrums, but its momentum was slower compared to its performance over the last four-and-a-half weeks, when it gained 550 points. It  remained close to yesterday’s record close this morning at 8,3560.

With this weekend set to be the warmest of 2024 so far, the City will be hoping that the strong spring run turns into a red-hot summer for London shares.

The FTSE’s strong run has helped to close the valuations gap with the US, which has been a major source of concern in the City. The massive difference in valuations between British firms and similar ones in the US, especially in the tech sector, led to a number of listed firms like Darktrace and DS Smith being bought out, while others such as Flutter and CRh switched their listings to the US. Meanwhile, a dearth of London IPOs - with only one new main-market listing in 2024 - meant new listings were not replacing the firms disappearing off the London stock market.

But cracks appeared in America’s tech-led 2024 stock surge overnight, fuelling the narrative that London’s ‘boring’ index and its heavy weighting towards sectors like consumer goods and industrials might not look so unappealing.

Results from Cambridge-based chips giant Arm disappointed Wall Street, sparking concerns that the AI-driven boom in New York-listed stocks was coming to an end. Arm had been a key symbol of the London valuation crisis, after its decision to sell its shares in New York instead of London, despite Government pressure.

Arm shares fell by 10% in post-market trading, taking $10 billion off its market cap. Other American tech darlings like Nvidia and AMD lost ground too. 

A cooling of US AI excitement could put UK shares back in fashion. The Bank of England cutting interest rates before the Fed, as is widely expected, will help too.

David Morrison, senior market analyst at Trade Nation, said: “The UK index is finally taking its place in the spotlight, and that should continue for as long as investors take a more cautious approach to tech stocks in particular, and growth stocks in general.

“There has been renewed interest in dividend-paying value plays, and there are plenty of those in the index. 

But even amid the strong share performance, caution remained.

Private equity group 3i said today that “uncertainty will persist in the near term” and this will hold back M&A opportunities. Meanwhile Tony Cross at Investegate said it “remains to be seen”. whether London stocks were on their way to overcoming the “blight” of low valuations.

Many think further support is needed to make that happen. This morning Peel Hunt said the UK ISA scheme could drive an additional £4 billion of investment in London shares.

Fraser Thorne, founder of Edison Group, said: “The City is still a premier global financial centre – we now need fewer jeremiads about its future, and more frank discussions about what we can do to refresh it.”