Several UK companies have chosen to move their primary listing to the US and more are considering the option, as the FTSE has fallen to record low valuations, but this is not the disastrous sign that it might appear, according to Alex Wright, manager of Fidelity Special Values trust and Fidelity Special Situations fund.
The likes of building materials group CRH relisted in New York earlier this year, explaining that it would bring increased commercial, operational and acquisition opportunities while Cambridge-based chip designer ARM shunned the London stock exchange for its IPO and chose instead to list on the Nasdaq.
Conventional wisdom suggests that the health of a market is based upon its new listings, but Wright argued that the trend of companies choosing overseas markets to list is an incredibly bullish sign for the UK market and a bearish one for its US rival.
He said: “There is a gnashing of teeth about this, with people asking why those companies are relisting in the US. It's incredibly clear why they are doing this. That’s because the US market is fundamentally overvalued. Why wouldn't you want your company to get the wrong share price on the upside?”
Wright, who defines himself as a value contrarian investor, explained that UK companies relisting in the US experience a huge upside because the US market trades on 18x forward price-to-earnings (P/e) multiple, while the UK trades at 11x. The same applies to UK-listed companies getting bought by private equity firms, as the latter tend to get their cue from the US market.
He added: “In the UK, you're getting good companies at low prices, while you're getting really expensive companies in the US. I don't want to be the buyer of US assets. I want to be the owner of UK assets.”
One of the reasons why some UK companies are very keen on relisting in the US, according to Wright, is because management teams are often remunerated when their company’s share price goes up. A key way to do that today is to tap into “the world’s most overvalued market”.
Alexandra Jackson, manager of the Rathbone UK Opportunities Fund, added that relisting in the US also removes the limits on executive pay, as the rules on this matter are more stringent in the UK.
While the main drivers of relisting are often to achieve a higher multiple, she believes that other reasons can justify moving the listing away from the FTSE.
Jackson said: “Listing location is far from the only driver of multiple. Work from UBS suggests that, rather than trying to game the system to achieve the best multiple, companies should list where their major operations are.”
She also highlighted that it is possible for UK companies to reach higher multiples while staying listed in the UK. She gave the example of Ashtead Group, that she holds in her fund, and is among the UK companies trading on higher valuations than their US equivalents.
Jackson added: “Smaller UK companies may get lost on the NASDAQ, whereas they might have scarcity value in the UK. This issue has become another negative factor in the doom loop that overtook UK equities in the summer.
“We’d like to see changes to listing rules such as the removal of the standard versus premium listing in London."