CAN LONDON & NEW YORK STAY ON TOP AS THE WORLD’S FINANCIAL CAPITALS? - The Times - 23rd July
Updated: Jul 20, 2020
In July 2019 I had just competed a major piece of research that examined how to rank global financial centres.
The article below appeared in The Times on 23rd July 2019, focusing on the ranking of global financial centres
Can London and New York stay on top?
Where is the most competitive global financial centre from the viewpoint of investors and shareholders? This is the focus of my new report for Netwealth, the challenger wealth manager.
There are few rankings of global financial centres. The main ranking with a long track record is produced half yearly by Z/Yen. It usually shows the top place oscillating between London and New York. Another excellent ranking is relatively new, with the first version released earlier this year by New Financial. This ranks countries, not centres, and produces a radically different outcome. The US is way ahead of China in second, which is also far ahead of the UK in third.
Our analysis suggests that, based on the key variables that matter for investors and shareholders, the US and UK dominate. But, as we have seen in recent years, global competition is intensifying. This is evident in multiple ways. Size is one, as there are fourteen stock exchanges whose market capitalisation exceeds one trillion dollars, led by the USA $32,178 bn; China $6,646 bn; Japan $5,762 bn; Hong Kong $5,339 bn and the UK $3,230 bn.
Another example was the intense race in 2017 to attract what was planned to be the world’s biggest international listing, of Saudi Aramco. While it did not materialise, it exposed the extent to which countries were prepared to compete for listings
Perhaps an important message for the UK is to be aware that this global competition could emerge from multiple centres. For instance, one surprise in our rankings is the strong performance of Australia and Canada, which have similar legal and corporate governance systems.
Another challenge is from domestic pressures, to get the balance right between shareholders and stakeholders. This is vitally important. However some countries may move too far towards defensive or protectionist tendencies, which are neither constructive for economies or shareholders. Fears of this defensive mindset were evident last year in the decision by shareholders to resist Unilever’s desire to unify its capital structure away from London to what they viewed as the less supportive jurisdiction of the Netherlands.
We identified a dozen factors that matter most for investors. There are foundation factors such as the economic landscape, vital for returns and determining how financial centres develop. Another is fostering a dynamic and responsive regulatory regime, ensuring financial stability while allowing innovation. Then there is the protection from good governance, essential for shareholders.
There are factors linked to the present make-up of equity markets such as their depth, concentration bias, international focus and openness. For instance, even though an increasing number of countries are developing their financial centres, many exchanges have a concentration bias with a small number of shares accounting for the bulk of turnover and activity. According to the World Federation of Exchanges, for instance, this ratio in Europe ranges from high concentration bias of 96.2% in Luxembourg and 88.6% in Ireland to a better balance shown by Deutsche Borse of 40.0%, Euronext 30.8% and the LSE 29.4%.
Meanwhile, there are economic benefits from being open and transparent. The entry of international financial institutions can help make a sector more competitive and efficient, facilitating economic development and growth.
One transparent measure for investors is the mix between domestic and international shares on any index. On the US Nasdaq the international ratio is 14.2%, on the NYSE it is 22.3%. Meanwhile, Singapore’s 33.7% contrasts with less than one per cent in Japan. London’s international focus is a highlight, with around one-fifth of securities listed being international.
Some influences central to future success are technology and financial innovation. These boost the experience for investors, permit new entrants, increase transparency and reduce fees and costs. London appears well ahead, while Hong Kong and Singapore have aspirations to succeed.
Other influences are the adherence to a green agenda, competitiveness and soft-power. Climate change and sustainable finance has not previously been talked about in terms of ranking financial centres, but may become of critical significance. Last year the G7 announced they are developing common new definitions, standards and classification systems for sustainable finance.
In terms of soft power, many of London’s attributes are “Brexit proof” covering the English language, time zone and rule of law, plus the wider agglomeration effects that emerge from having such a deep cluster.
We ranked different countries and produced a global top ten. The US just pipped the UK to first place. In a post Brexit world the UK needs to recognise where the leading global competition is. It is from the US which has the scale and depth to make it attractive, and from centres across Asia. Singapore beats Hong Kong to third slot.
In addition to the top two, an interesting result was the cluster of three centres that occupied 5th to 7th place. These were Switzerland, followed by Australia and then Canada. Switzerland’s historic position is well known. Australia and Canada can easily fall below the radar screen, yet both perform consistently well across a range of measures. Moreover, Australia’s proximity to the growth region of east Asia should underpin it in the future.
The rest of the top ten is made up by Germany, China and Japan. One might expect China and other emerging centres to perform more strongly in the future as their economies grow and markets deepen.
Our top ten from the viewpoint of investors was 1. US 2. UK 3. Singapore 4. Hong Kong 5. Switzerland 6. Australia 7. Canada 8. Germany 9. China 10. Japan.
It is hard to quantify fully how to measure the relative attraction of financial centres. We have identified key criteria for investors. A broad range of centres emerge. A key message for the UK post Brexit will be that financial centres thrive based on the regulatory environment and on ensuring an attractive location where clients want to do business.
Dr Gerard Lyons is chief economic strategist at Netwealth