How the Footsie is becoming the Russkie
Matthew Lynn Nov 07, 2011
It is probably too early to break open the caviar, but at the very least the City’s big firms should get some decent vodka on ice. Why? The Russians are riding to the rescue.
Most of the City is dead quiet. There is little sign of any merger and acquisition work. The markets are flat at best. Nervousness over the fate of the euro is preventing most people from investing. But in the last few weeks, there has been a wave of Russian companies arriving on the stock exchange.
Last week, Polymetal – a huge mining conglomerate, and Russia’s fourth-largest gold-miner – started trading on the London market. It is set to be followed in the next few weeks by Polyus Gold and Chelsea owner Roman Abramovich’s steel manufacturer Evraz. On Monday we learnt that the Russian potash miner Uralkali was considering a London float in 2012. At this rate, we’ll soon be referring to the Russkie rather than the Footsie. In truth, London has already carved out a lucrative niche hosting companies from around the world. Plenty of big companies from the former Soviet republics and the emerging BRIC countries (Brazil, Russia, India and China) have already listed here. The trouble is, plenty of people are complaining that they lower standards too much – and risk turning London into a spiv’s market. That is crazy.
The FTSE has, of course, been getting more and more international over the last decade. The Swiss commodities giant Glencore listed here earlier this year, and shot right to the top of the FTSE 100 index. London is already home to a whole crop of resource companies, many of which are very substantial. African Barrick Gold, Kazakhmys, the Kazakhstan copper miner, and Xstrata, the Swiss-based mining conglomerate, are all in the index. Indeed, anyone investing in the FTSE 100 needs to be aware that they are buying into a rather odd collection of global mining conglomerates and developing-world manufacturers. Their performance, while it may be good or bad, is not going to have much to do with how the British economy performs.
True, the governance record of some of the companies from the big emerging markets has been far from spotless. The Eurasian Natural Resources Corporation, a Kazakh mining business, has been involved in a string of controversies. Bumi, the Indonesian coal-mining vehicle bought to the market by Nat Rothschild, has had a rocky ride over the last few weeks. But it would be a catastrophic mistake for the City not to welcome foreign listings – or to lay down so many politically correct conditions that they are effectively deterred from listing here. There are four good reasons for that.
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Firstly, the BRIC nations are where the growth is. The UK has too much debt to grow very fast. So does the eurozone. The US is hardly in better shape, and anyway, it already has a huge financial centre of its own. The BRIC countries, by contrast, are all expanding rapidly and are likely to carry on with that for the rest of this decade and beyond. We would think it very odd if Unilever, BP or Glaxo weren’t trying to secure a foothold in the world’s fastest growing economies. It would be just as strange if the City wasn’t doing the same thing. Next, the UK is not a big enough economy anymore to support the City. London might have started out as a British financial centre, mainly servicing UK companies and savers. It has long since outgrown that. There isn’t going to be enough business in this country to support it over the next few years, and the City is too important a part of the economy to be allowed to shrink. It also can’t afford to be too precious about where its business comes from.
Third, with the eurozone consolidating, the City may well find itself frozen out of the European markets. The core euro nations look set on forming an integrated economic bloc, with a common fiscal policy, and jointly issued euro-bonds. Will they allow the City to be the financial centre for that? It is about as likely as the Greeks paying back the 50% of their debts they haven’t already defaulted on. The core eurozone countries will make sure that work goes to Paris and Frankfurt. Worse, the Tobin tax – a levy on every financial transaction – may well be part of new eurozone rules. The City couldn’t survive that. If European work dries up, it will need to be replaced with something – and the new BRIC companies are the best alternative.
Fourth, although it is easy to be sanctimonious about the corporate governance standards of some emerging-market companies, it isn’t as if our own record is pristine. Banks such as the Royal Bank of Scotland embarked on crazed takeovers at the peak of the market, then passed the bill on to the taxpayers. FTSE chief executives routinely award themselves millions a year in salaries and bonuses while delivering nothing for shareholders. The London market has not been short on frauds and scandals over the years – and all of them home-grown.
A London market dominated by emerging-market companies won’t be perfect. It will have its share of scandals. And it will be volatile. But over the medium term, it will be more lucrative for the City, and more rewarding for investors – and that surely is a good thing.
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