London is poised to reclaim its position as the largest European stock market by market capitalisation, having been usurped by Paris at the tail end of 2022.
Based on the latest data provided by Bloomberg, the combined market cap of primary UK listings was US$2.9 trillion (£2.39 trillion/€2.75 trillion) against France’s US$2.93 trillion (£2.41 trillion/€2.78 trillion).
Barely six months ago, this gap was as wide as US$250 billion, meaning the London markets have since narrowed the difference by up to 88%.
Is this a sign of strength in the British capital markets or weakness across the Channel?
Shell vs LVMH
France benefitted greatly from a rally in luxury stocks earlier in the year. Paris’ CAC 40 index is heavily weighted to luxury brands, with LVMH, L’Oreal and Hermes comprising the top three constituents by market cap.
As an example, LVMH rallied nearly 50% by the end of April, encouraged by an increase in sales of luxury goods in China, a strengthening euro and a strong first-quarter earnings call.
However, China’s anticipated post-Covid recovery has been far slower than anticipated. Being the primary buyer of luxury brands that China is, stocks have all but shed these early-year gains as a result.
In a research note published this weekend, Citi analysts contended that “luxury goods has been the worst performing European sector recently. The previous positive sentiment and outperformance post-China reopening has now unwound, while fundamentals remain stable”.
In comparison, the London stock market’s weighting towards oil and gas energy stocks has boded well for the City.
The FTSE 100’s largest constituent Shell PLC (LSE:SHEL, NYSE:SHEL), following a ropey first half, has since rebounded significantly due to a surge in oil prices - from less than $70 a barrel in June to over $90 a barrel today.
Shell is currently more than 10% higher year to date against less than 3% for LVMH.
British equities still remain heavily discounted against the global average, so while reclaiming the top European spot would be worthy of celebration, there is little doubt that at least some of this comes down to realtive weakness across the Channel.
Oil prices in focus
Oil prices, too, might have already peaked. Brent Crude is projected to average $85 a barrel in the fourth quarter against $92 or more at the end of September, influenced by a myriad of geopolitical and economic factors.
Only modest oil demand growth is anticipated, with a watchful eye on China’s economic performance.
Saudi Arabia’s continued oil production cut and the US’s strategic oil purchases are only temporary measures, contingent on economic and price stability. With that in mind, OPEC+ could cut production further, as could Russia, making the outlook all but certain.
At the same time, Citi analysts reckon luxury stocks could bounce higher, “especially as key headwinds (higher rates, China slowdown) could soon abate”.
“China growth has slowed, and our economists now project sub-5% GDP growth this year,” Citi stated. “But we may have reached a cyclical bottom following meaningful policy easing and several better-than-expected datapoints. Shifting sentiment would help China-exposed sectors like Lux Goods and Europe more broadly.”
So, despite the London Stock Exchange playing catch up with its Paris equivalent, a 'flippening' is not a foregone conclusion just yet.