Cocorico: on Monday 14 November, the French press unanimously hailed the capitalization of the Paris stock exchange, which surpassed that of London. While these financial centers are rivals for more than two centuries Paris experienced a long eclipse from 1914 to 1985 before finally seeing the possibility of rebirth “. We now read that he would dethroned » London. What does it mean ? We begin by explaining what market capitalization is before asking how Paris overtook London, and how we can interpret this event. Market capitalization is the total value of publicly traded shares. Since shares represent the property rights of the companies that issued them, the capitalization of a stock exchange therefore measures the value of the corresponding companies.
However, this value is virtual, both because it represents future profits and because it cannot be converted into purchasing power without selling all the securities, which would lead to their decline. A capital increase is therefore only a promise.
And it should be remembered in this regard that:
- not all companies are listed, because listing, while giving access to financing on the market, involves costs and risks,
- there are sources of funding other than the markets, in particular banks,
- it is entirely possible for a company from one country to choose to be listed on a stock exchange located in another country.
But these reasons are not enough to interpret the recent dynamics of the Paris and London stock exchanges.
Non-indexed stocks lead Paris
On 23 June 2016, i.e. the day of the referendum on leaving the European Union, capitalization in London measured in euros was around 2,900 billion, against 1,750 in Paris. Since that date, the pound sterling has fallen against the euro (-6%) and the London stock exchange index has progressed less than the Paris index: 14% for the FTSE against 30% for the CAC 40. However, these the two effects combined explain only a quarter of the recovery made by the Paris Stock Exchange.
The remaining three-quarters are therefore due to changes outside the perimeter of the indices. They can be explained either by market introductions or exits, or by changes in the price of “small” stocks that are not taken into consideration by the indices.
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The volume of entries/exits appears very limited for Paris (less than 5 billion a year, with a slightly positive balance) and more significant for London. Across the Channel, despite a much higher introduction volume, losses are still dominating due to acquisitions: On July 18, 2016, the Japanese company SoftBank bought the microprocessor maker ARM for £24 billion, hence its withdrawal from the . Others came later, but the total net flows account for less than 5% of the change in the spread between London and Paris, which is therefore almost three-quarters due to the change in stocks off the indices, and therefore stocks in the la most small businesses that grew much faster in Paris (+150%) than in London.
If we take a closer look at the list of companies presented in Paris, we see that they are not all French: for example Be-Bô is a start-up in the healthcare sector domiciled in Geneva, Kompuestos, a Spanish specialist in plastics, etc. However, these two cases are different: the first corresponds to an IPO in Paris, the second to the additional listing in Paris of a company previously introduced on the Madrid Stock Exchange. But then, should the capitalization of Kompuestos be counted for Paris or for Madrid?
We count for Paris those shares which are held by people resident in France, as is customary: why then not include in the capitalization of a place all foreign shares held by residents, even when the shares in question are not actually listed (i.e. traded on time real) on the stock exchange?
Under these conditions, London clearly surpasses Paris. In fact, the City has a special infrastructure called CREST: as a depositary of international securities, CREST issues digital certificates representing foreign shares to UK residents. Taking into account all shares listed abroad, the capitalization held by UK residents is $6.2 trillion, compared to $3.7 trillion in mainland France, as suggested by the Financial Times. The difference is largely explained by pension funds whose asset value amounted in 2021 to more than $3 trillion in the UK versus less than $100 in France.
The additional “services” of the Municipality
But a financial center is not just a stock exchange, debt securities also represent a considerable capitalization: 128,000 billion dollars at the end of 2020, of which Paris represents less than 4%, i.e. slightly more than London. On the other hand, the most important market in terms of volume is certainly that of foreign exchange: London represents 38% of world activity with over 3,700 billion dollars of daily transactions, Paris is 200 billion. And more generally, in terms of financing, the London market plays a central role because a large number of international contracts are drawn up under British law, with respect to law firms (law) British.
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For example, the first sukuk (Sharia-compliant investment certificates) issued by an American company to allow the purchase by GE Capital (financial subsidiary of the American General Electric) of an aircraft fleet were contracts based on a vehicle ad hoc listed on the London Stock Exchange and pays a periodic dividend in London. Ships, buildings, containers, works of art: for all these assets, London companies know how to draw up the contract that allows them to be acquired under a favorable tax regime in a chosen territory (for example, a trust in Jersey or an entity ad hoc Bahamas) by arranging adequate funding. By comparison, Paris offers mostly conventional means of financing and no special legal regimes.
It is thanks to these ancillary “services” that since the post-war period London has ranked second among the world’s financial centres, far surpassing Paris. London still employs over a million people in the financial sector, 25% more than in France. However, the gap has narrowed since Brexit: it is the “Brexode”.
However, one can wonder about the consequences of this trend on the rest of the economy in terms of growth. Remember that with a GDP 40% higher than France, Germany has a market capitalization 40% lower. The new-found esteem of the markets for the economic future of France, rather than an occasion to rejoice, therefore offers us the occasion to recall that the value of companies is based above all on an implicit social pact.
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