Not too long ago, the UK was an epicenter of diverse stock exchanges – from London’s thriving hub to the bustling trade centers in Aberdeen, Cardiff, Leeds, and Edinburgh. The smaller exchanges folded into London’s might by 1973.
Fast forward to today, the might of the U.S. looms large, echoing the monopolistic dominance once held by London. New York is rapidly becoming this century’s behemoth, overshadowing European exchanges in a manner reminiscent of the City’s dominance last century.
The question is, are we staring down the barrel of a transatlantic power play that could make European bourses subservient to their American counterparts?
U.S. Attraction: Size, Influence, and Power
The meteoric success of the recent Arm flotation – a British company getting listed in New York and drawing attention fivefold – is just a hint.
The whispers in the hallways of investment banking firms suggest that numerous European IPO hopefuls are casting longing glances across the Atlantic, tempted by the grandeur of Nasdaq and the NYSE.
The rationale? Many of these Europe-rooted firms are, ironically, primarily owned by U.S.-based venture capitalists. It’s no secret; these VCs prefer the familiar, vast expanse of American bourses for their post-IPO holds.
The sheer magnitude of the U.S. in the equity landscape is breathtaking. With a whopping 70% of the MSCI World index pocketed by U.S. equities, the combined might of Japan, the UK, France, Canada, and Germany barely scrapes up to 20%.
To get even more audacious, the top ten U.S. equity giants, including powerhouses like Apple, collectively overshadow the total market capitalizations of those five nations.
Is Europe on a Collision Course?
The U.S. stock exchange’s towering dominance isn’t some fluke. Built on the country’s impressive economic growth post-financial crisis and magnified by corporate earnings and share buybacks, U.S. equities have become the globe’s darling.
The value of the S&P 500 has skyrocketed post-crisis, while Europe’s counterpart, the Euro Stoxx 50, has sluggishly climbed less than 75%.
Foreign investors, unable to resist the siren call of U.S. equities, now own an astonishing $14tn of them. The U.S. has, in essence, crafted the largest equity reservoir worldwide, attracting a steady flow of domestic and global issuers with its depth and liquidity.
This begs the ominous question: What’s stopping the U.S. from stretching its 70% MSCI World index influence to, say, 80% in the next decade?
This U.S. tidal wave forces European policymakers into a tight corner. No amount of teeth-gnashing can change the simple fact – the allure of U.S. valuations is irresistible.
Consequently, the exodus of prestigious deals to New York is inevitable. Europe’s financial hubs – London, Paris, Amsterdam, Frankfurt – must either evolve or face the risk of being reduced to mere footnotes, much like their bygone provincial peers.
Instead of lamenting this seemingly inevitable trajectory, Europe needs to re-strategize.
It’s time to double down on fortifying domestic markets for small and medium enterprises, simplifying bureaucracy-ridden listing processes, and providing enticing incentives for domestic investment.
Sure, the UK’s recent Edinburgh reforms and overtures to ease listing rules are commendable steps, but it’s a tightrope walk. European capitals need robust regulations without compromising market attractiveness.
Europe’s financial nerve centers aren’t destined to be devoured by the U.S. But, without proactive, aggressive strategies in place, these cities could find themselves playing second fiddle to New York’s imposing orchestra.
If European exchanges don’t recognize and prepare for this looming challenge, they may indeed become mere footnotes in the annals of financial history.