Paris defeats the City of London with a 'sorpasso' on the stock market

Paris can no longer only boast of its planetary cultural irradiation, diplomatic influence and tourist attraction.

Thomas Osborne
Thomas Osborne
21 November 2022 Monday 10:45
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Paris defeats the City of London with a 'sorpasso' on the stock market

Paris can no longer only boast of its planetary cultural irradiation, diplomatic influence and tourist attraction. The French capital has just accomplished a financial feat that would have been unimaginable before Brexit: its stock market has outperformed London's for the first time.

The Bloomberg agency announced last Monday that, according to its calculations, the capitalization of companies listed on the Paris Stock Exchange reached 2.823 trillion dollars, compared to 2.821 trillion for the London Stock Exchange (LSE), its competitor on the other shore of the English Channel.

There are multiple reasons that explain why the Paris Stock Exchange has dethroned the London one. The first and most obvious is the departure of the United Kingdom from the European Union, decided in a referendum in 2016 and made effective in January 2021 after a few chaotic years of negotiation over the terms of the divorce. Suffice it to recall that in 2014, when the city on the Thames, still cheerful and confident, was the most dynamic metropolis in Europe, the capitalization of the LSE companies was almost twice that of the Paris Stock Exchange.

The British totally miscalculated. They thought that by getting rid of some European stock market rules, they would attract more companies. Actually the opposite happened. The Europeans stuck together and managed to convince the big economic players that operating from within the EU would be more beneficial than operating from outside. Heavyweights like low-cost airline Ryanair went public on the Dublin Stock Exchange. The BHP mining group, in Sydney, Australia. Large banks well established in London, such as JP Morgan, have had to relocate entire teams to the Continent or to Ireland, for both practical reasons and legal imperatives, for example due to the requirement to be registered in the EU to sign contracts with clients and investors. Often they are top executives. Not only Paris has taken advantage of the situation. Also Amsterdam (whose stock market is the first in Europe in volume of transactions), Luxembourg and Milan.

Other collateral damage from Brexit is the loss in value of the pound sterling, which has depreciated more against the dollar than the euro. That has lowered the value of many London-listed companies. The prospect of a recession and the political upheaval following the replacement of Boris Johnson by the short-lived Lizz Truss at 10 Downing Street have contributed to a sense of unbusiness-friendly crisis.

In strictly financial terms, a key factor in the primacy of Paris is the rise of the luxury sector, of giants such as Kering, Hermès, L'Oréal and, above all, the LVMH group (Louis Vuitton). The latter is the most capitalized in Europe. It has exceeded 350,000 million euros, five times more than in 2016. Forecasts indicate that the consumption of high-end products may continue to grow at a strong pace in the coming years, despite economic uncertainties and geopolitical risks. The clearest case is China, where purchases will benefit from the end of covid lockdowns.

In London they do not hide their frustration at having lost the stock market crown. “The British economy as a whole has been durably damaged by Brexit,” Michael Saunders, a former member of the Bank of England leadership, commented on the same Monday after the Bloomberg data. "The loss of first place, to the benefit of Paris, in share value will be seen as a blow to the prestige of the City," Russ Mould, of AJ Bell Investors, told the BBC.

Other analysts qualify the relative decline of London and the prosperity of Paris. Market capitalization is not the only factor that determines the power of a financial market. It is necessary to take into account the volume of exchanges in derivatives and other products, as well as the foreign exchange market. Despite its problems, the City continues to be a power in the so-called "professional services", that army of lawyers, auditors and consultants that orbit the financial universe, with its worldwide network of clients.

The Financial Times admitted the “horror” that the Parisian sorpasso has caused, although it has recalled the concept of free float (shares that can easily change hands), in which London would surpass Paris. According to this calculation, it would be enough to discount the titles that the main owner of LVMH, Bernard Arnault, owns and that are not for sale, for the London Stock Exchange to get ahead again.

In Paris they have avoided triumphalism, aware that the ranking could be ephemeral. “We are not reacting to this question”, was the laconic response of the French Ministry of Economy and Finance when La Vanguardia requested a valuation of the brand new top spot on the Parisian stock market. Only the Minister of Commerce and SMEs, Olivia Gregoire, spoke in a tweet. For her, the news "is not a coincidence but the fruit of a stable and attractive economic policy for six years now (Macron's years at the Élysée)". The former minister and current MEP Nathalie Loiseau, from Renacimiento – the presidential party – stressed that “membership of the EU demonstrates its advantages every day”.

The media echo was moderate. For the economic newspaper Les Echos, what happened is a sign of "the loss of competitiveness of the British economy" after leaving the EU. Along the same lines, Le Monde spoke of "one more sign of weakening" in London. "Letting go of the moorings with Europe has deteriorated the business climate on the other side of the English Channel," added the newspaper, while warning that London's decline will continue in the medium term due to tax increases and cuts in public spending. "It is clear that the golden age (of London) is over," Le Monde said.

Parisian domination, if it consolidates, will be an injection of morale for a country where complaints and analyzes abound that predict an inexorable national decline, what they call déclassement (loss of rank) in front of the greats of the world. Former President François Hollande himself recently used that term when judging that the signs of French decadence are evident. For Macron and his government, on the contrary, the leadership of the Paris Stock Exchange is proof of nine that his policy of making France a more attractive country is paying off. Since he arrived at the Elysée in May 2017, the president – ​​who worked at the Rothschild investment bank before dedicating himself to politics – has been very determined to attract capital and economic activity. Every year a conference of the Choose France program is held, with the presence of dozens of captains of foreign multinationals.

One of the lures for attracting business to Paris is the very generous special tax regime offered to highly-paid executives during the first years they reside in France. The objective is not only to seduce foreigners but also thousands of French people who have been working in the City for years. A part of the latter has already made the move to the city of the Seine. They are the ideal candidates, due to language and social ties, to transfer to Paris when their banks or consultancies expand their presence in France.

However, executives based in London, used to great labor mobility, are not quite convinced by Paris because tax incentives expire if they change companies once in France. One of the tempting alternatives is Milan, another major stock market. Italian tax advantages may even outweigh French ones. Paris offers its charm, its myth, and the fact that it is two hours by train from London. But Milan has the Duomo and is strategically located, not far from the ski slopes of the Alps or the beaches of the Mediterranean. There is competition to capture the masters of finance.