U.K. small-cap index headed to extinction, analyst warns

By Louis Goss

A leading index of small market capitalization companies listed on the London Stock Exchange will "cease to exist by 2028" if the lack of public listings continues at current levels, as there won't be enough U.K. listed firms to fill it out, analysts have warned.

Analysts at Peel Hunt led by Charles Hall said in a note on Wednesday that the FTSE SmallCap Index is on track to be entirely depleted by 2028, if companies continue delisting at current levels and the current dearth of initial public offerings (IPOs) sees too few firms fill their place.

At the end of 2023, there were just 114 companies listed on the FTSE SmallCap Index UK:SMX, compared to the 160 that were included in the index at the end of 2018, as the result of a flurry of M&A deals that have taken companies off London's markets.

If current trends continue, this will see the last company leave the FTSE SmallCap Index by 2028, Peel Hunt's analysts said. They blamed low valuations on the London Stock Exchange - caused by record withdrawals from U.K. investment funds - for the index's decline.

They explained that low valuations on London markets - resulting from 34 months of consecutive outflows from British investment funds - has made M&A activity a more attractive prospect for both buyers and sellers and seen the prospect of a public float lose its appeal.

The situation could, however, turn around dramatically if valuations of London listed companies start to recover and current trends go into reverse, Peel Hunt's analysts said, and they argued an improvement in the state of the U.K. economy could spark such a switch.

They said the U.K. government could also improve the situation by lowering Britain's 0.5% stamp duty tax on share purchases and incentivizing pension funds, insurance companies, and retail investors to invest in London listed shares through policy shifts.

Companies could also help themselves by boosting their own valuations through share buybacks, Peel Hunt's analysts said, arguing that any increase in investment in London markets would likely drive interest from overseas investors too.

-Louis Goss

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04-03-24 0935ET

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