Our stock of the week is London Stock Exchange (LSE), as voted by our Twitter followers, in a poll that included firms directly affected by Britain’s trade prospects after Brexit.
Unlike the other companies in our poll, BAE Systems, Rolls-Royce and Smith & Nephew, the LSE is the only company on our list not to make anything. Instead it acts as the exchange where investors private and professional can buy or sell shares. Companies use the LSE to raise money by issuing shares and bonds – so when you buy a stock, investment trust or ETF, chances are it will be traded on the LSE. Or when you buy units in a fund, the manager will have bought the stocks in his or her portfolio on the LSE. The LSE also owns indices such as the FTSE. So when we asked the question, “What is the Stock Market?” in a recent video, many people would think of the London Stock Exchange and the LSE is intimately connected with how London sees itself as a global financial centre.
In the last 10 years the exchange has had to deal with the fallout from the financial crisis, the Brexit vote, and now a global pandemic – and in that period the LSE’s shares have risen by more than 10 times, from around 700p in 2010 to £87.64. The shares fell sharply in March but are around 100p higher than at the start of the year, as the increased market volatility has boosted trading volumes. One reason why the company seems to strengthen through each successive crisis is its competitive position – awarding the LSE a wide economic moat, Morningstar analyst Niklas Klammer says “London Stock Exchange Group has transformed itself from a small, regional fixture into a dominant global player in the financial infrastructure market by spotting structural trends early.” He says that LSE’s information business, which sells analytics and data via subscription, is a particular source of competitive strength.
Data is now a hot commodity for stock exchanges and information providers, which explains why the LSE is paying $27 billion to buy data provider Refinitiv, a deal that has hit EU regulatory hurdles but is expected to go through next year. LSE has had to make several concessions to the European Commission before the takeover occurs – such as selling Italian stock exchange Borsa Italiana – but Morningstar’s Klammer now expects the deal to pass in 2021. “Exchanges with strong data sets across multiple trading platforms and financial instruments such as LSE, benefit from a regulatory push for more transparency and the fact that such data sets are not easily replicable,” he says. “Reporting requirements have grown such that market participants increasingly rely on current as well as historical trading data sets for internal and external calculations and analysis.” These demands for transparency have grown under a set of EU market rules known as Mifid II.
Klammer adds that the inexorable rise of passive investing will help LSE in the long term through its ownership of FTSE Russell indices, which it licenses to ETFs and other funds for benchmarking – (think how many ETFs have “FTSE” in the name, for example). “The segment is dominated by a handful of indexes globally, among which FTSE Russell, which all enjoy significant brand recognition and are easy to understand and to benchmark against,” he says.
While markets have boomed towards the end of the year, Klammer says there are risks attached to owning an exchange owner in a scenario of a sustained bear market. “ Although LSE’s business mix offers a diversification effect through different exposures to market volatility and macroeconomic backdrops, the group is not immune to a prolonged market downturn, resulting in lower volumes traded, less clearing, and lower demand for index products,” he says.
LSE’s share price boom has not gone unnoticed among fund managers, among them Lindsell Train manager Nick Train. He likes the subscription model offered by LSE and other companies who “all benefit from being able to charge their customers at regular intervals for continuing services that by and large those customers need to stay in business”. According to Morningstar Direct data, LSE makes up 12% of the Silver-rated Finsbury Growth & Income Trust (FGT), just over 10% of the Lindsell Train UK Equity Income fund, and around 9% of the five-star rated Lindsell Train Investment Trust (LTI). LSE is also on the radar of a number of ESG-focused funds, such as five-stared rated Liontrust UK Ethical and Royal London Sustainable Leaders, which has a Morningstar Analyst Rating of Silver.
