Once upon a time, if you were an emerging market company – domiciled in Russia or India, for example – looking for exposure to global investors via an international listing, your choices were rather limited; essentially boiling down to the transatlantic rivals of London or New York.
London Stock Exchange (LSE) in particular took full advantage of the opportunity to establish itself in a dominant position for international listings – one that it still enjoys today. Of the 2600 companies listed on its markets, about 600 are domiciled outside of the UK. Meanwhile, its Alternative Investment Market (AIM) is the pre-eminent international order book for smaller firms.
Now, however, the emerging markets exchanges are growing up and competition is looming. In a recent international survey of senior managers conducted by the Economist Intelligence Unit, 74% of respondents said that emerging market companies will be keen to list in other emerging markets, whereas only 27% believed that London would continue to play a global role for initial public offerings (IPOs) by 2025.
Pushing for growth
This should not necessarily come as a surprise. Now that almost all bourses are traded publicly, shareholders are pushing for growth, and the quest for expansion has begun in earnest. Casting an envious eye at the LSE’s impressive international board, more than one rival CEO might be forgiven for wondering how to emulate, or pilfer, some of its business. These exchanges are now also far more viable competitive propositions than they have been in the past. Most now boast the latest in technology and infrastructure, coupled with a vastly improved regulatory landscape.
The issue is further compounded by the inevitable shift in economic power from West to East; as well as the challenges that the European listings sector is facing in creating new business as financial markets crumble.
For the LSE, some degree of decline does seem inevitable. Indian firms, for example, among which the LSE has long been a popular destination for parallel listing or IPOs (via an international holding company as regulation prohibits first time listings on any foreign exchange for a company established and incorporated in India), are increasingly considering Asian options, says Yes Bank’s co-founder and senior managing director Aditya Sanghi. “We are seeing our clients looking eastwards. There is more appetite for markets such as Hong Kong in comparison with some of the more established Western destinations. This is often with companies that have some sort of China- or north Asia-based business model.”
There is more appetite for markets such as Hong Kong in comparison with some of the more established Western destinations
He adds that Singapore Exchange (SGX) has also been pitching itself enthusiastically to Indian firms. “It is also emerging as a fairly competitive destination... and while investors in Hong Kong naturally cover China, for those in Singapore, part of their footprint is naturally India.
An immediate threat?
So how immediate is the threat? Competition is certainly growing, says Tracey Pierce, director of equity primary markets with the LSE. However, Hong Kong, for example, only boasts about 20 international listings at present. Meanwhile, while the newly partnered Russian Micex and RTS exchanges are likely to be keen to steal business away from London, they might not be quite ready yet, says Larry Tabb, CEO and founder of research and advisory firm Tabb Group. “As Russia becomes more stable, one might assume listings will naturally flow back there... but there are other issues. Settling politics down would help, [as would] investors getting a better mechanism to trade stocks a little more anonymously. I’m not so sure that London’s position will be too challenged for a little while.”
Ms Pierce says that these new rivals are not being taken lightly by the group, however. “We are never complacent and we do take competition seriously. We monitor the activities of others, and we take action to ensure that we will continue to be well positioned in key areas.”
And London does enjoy a leading position in many respects. It not only has an impressive number of international firms actually listed, but also boasts the communities of investors, advisors and analysts that the listings themselves entail, as well as a huge pool of international capital and high levels of foreign investment into the LSE’s listed companies. The latter have resulted in high levels of liquidity for equities as well as depositary receipts – the chosen listing method for many emerging markets firms.
Sticky liquidity
This liquidity could prove rather sticky, says Mr Tabb. “What happens is that once liquidity is created, it is hard to move. If people come to London to trade Russia, for example, it might not make sense for some [Russian firms] to nip off to Singapore. There needs to be sufficient economics or a huge critical mass.”
He warns, however, that in London, exchange officials cannot afford to be complacent. “People are going to pick away at its business. The LSE folks need to be on their game, support their companies, and provide a nice home as well as the right economic models and liquidity providers.”
The LSE does appear to have some plans up its sleeve. “Competition is certainly increasing, and we have increased our activities in turn,” says Ms Pierce, adding that a large part of these activities involve stepping up marketing efforts abroad.
LSE’s primary markets division has long worked closely with pre-IPO companies and their advisors on the ground, to spread awareness of London’s potential benefits, particularly in its traditional BRIC (Brazil, Russia, India and China) markets. For the past five years, for example, it has had a co-marketing agreement with Micex to tout the advantages of dual listings in Moscow and London to firms across Russia.
However, these efforts are now being extended further afield, says Ms Pierce, including south-east Asia, Mongolia, and parts of Africa. The LSE’s strategy in Mongolia in particular could well be a sign of things to come, she says.
The exchange recently forged a strategic partnership with its Mongolian peer, under the terms of which the LSE will be involved in managing the Ulaanbaatar-based bourse’s modernisation programme and provide trading and market surveillance technology. Crucially for Ms Pierce, the two exchange groups will also combine forces to secure firms such as coking coal deposit developer Erdenes Tavan Tolgoi, which is set to list on LSE and the Mongolian exchange. “We’re working with Mongolian companies as we would in Russia or India,” says Ms Pierce. “But we have a strategic partnership that allows us to strengthen links with the country and gain exposure to their economic growth [which is currently the fastest in the world].”
Enough to go round
For now at least, the metaphorical pie may also be growing. Ms Pierce notes an increasing trend for emerging market firms looking to expand beyond their home markets and be listed with international peers. “The pipeline from regions such as Russia, the Commonwealth of Independent States and India is actually stronger now than before the financial crisis,” she says.
She adds that an increasingly global business landscape means firms might be keen to list internationally for reasons other than just diversifying their investor base and accessing a deeper pool of capital and liquidity. Some of the LSE’s emerging market clients are instead looking to do so in order to raise visibility in a particular region and conduct merger and acquisition activity using the reputation of London-listed paper as the currency in that transaction. “There are a whole range of reasons why one might want to list internationally, and I don’t see those going away in the short to medium term,” she says.
The danger, as real as it may one day be, has not yet arrived in earnest. Besides, says Mr Sanghi, even if the financial world does become more Asia-centric, LSE’s reputation should ensure future growth for some time to come. “There is a natural affinity for Indian firms to look at London, and the LSE still enjoys a phenomenal brand reputation; it’s an aspirational market as far as Indian companies looking to list are concerned. As and when markets improve and investor sentiment returns, I’m sure there will be a reasonable level of appetite among companies to go back and start exploring options there.”
And the LSE, Mr Tabb says, is positioning itself wisely. It may not have things all its own way in the medium to long term, but for now, few predict that the listings, reputation and business it has worked so hard for will evaporate.
