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London Reclaims Title as Europe’s Largest Stock Market

The UK’s main stock market has reclaimed its position as Europe’s most valuable for the first time in nearly two years, according to recent data. The total value of companies listed on the London Stock Exchange (LSE) reached $3.18 trillion on Monday, surpassing the $3.13 trillion total of companies listed in Paris, as reported by Bloomberg.

Although these valuations remain close and continue to fluctuate, analysts view this as a significant milestone. They attribute the decline in the French market to election-related uncertainties, while noting that the UK market is bouncing back after several years of underperformance. The LSE had held the title of Europe’s largest stock market for many years before being overtaken in November 2022.

At that time, analysts blamed the LSE’s poor performance on various factors, including the aftermath of former Prime Minister Liz Truss’s mini-budget, a weak pound, recession fears, and Brexit. In 2016, the LSE was valued about $1.4 trillion more than its Parisian counterpart.

Market investors generally dislike uncertainty, and many questions remain about the implications of France’s upcoming election. President Emmanuel Macron called a snap election earlier this month following a win by Marine Le Pen’s right-wing National Rally in European elections. Susannah Streeter, head of money and markets at Hargreaves Lansdown, noted that the National Rally’s manifesto contains “unfunded spending,” which does not reassure market investors.

Financial markets often react negatively to uncertainty, as it impacts the value of bonds—money investors lend to the government at market-agreed rates. If investors doubt a government’s policies, bond yields rise, affecting the value of listed companies. High bond yields make government loans more attractive than investing in company shares.

In the UK, Labour Party, currently leading in the polls ahead of the general election, has been trying to reassure investors of its fiscal responsibility. The Conservative Party is also working to convince investors of its approach. Chancellor Jeremy Hunt recently stated that concerns about London’s stock market decline are “massively overstated” and emphasized ongoing efforts to address market challenges.

One significant challenge for the LSE over the past decade has been attracting investors and companies tempted by American exchanges. Several large firms, including UK-based ones, have chosen to list in the US, boosting the value of American stocks and encouraging more companies to follow suit. The S&P All-Share index, which tracks every listed company in the US, has surged over 85% in the past five years, compared to a less than 10% increase in the UK’s FTSE All-Share index.

However, the UK index has gained momentum since the start of this year, partly due to expectations of declining interest rates, allowing British companies to borrow money more cheaply. Despite this, British stocks remain much cheaper than American stocks relative to their earnings. AJ Bell’s investment director, Russ Mould, suggested that investors might be overvaluing US companies and undervaluing UK ones. He also noted that the main US exchanges rely heavily on a few highly valued tech stocks, such as Google, Apple, and Amazon, which may not be sustainable in the long term. “If everyone is sitting on one side of the boat, it’s going to tip over eventually,” Mould remarked.

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