It is a long time since stockbrokers were chucked out of London’s Royal Exchange for being too rowdy. The London Stock Exchange emerged from the brokers’ new home in a coffee shop, which is now planning a far bigger move: a merger with the Toronto exchange.
Assuming the deal goes through, the new company will have more listed miners than anywhere else. That might remind investors that buying an index based on an exchange is a historical anomaly with little to justify it. When picking an index to track, investors are typically domestic: in Britain, that usually means the FTSE All-Share index.
But it is naive to assume this gives exposure to one’s home country, or even currency. Consider this sales pitch: track an index based on miners, oil companies and banks. No one is likely to put money to work on that basis, yet together the financial services, oil and gas and mining sectors are more than half the All-Share.
Perhaps the index never really represented the British economy. Standard Chartered, for example, has been listed in London since 1969, but virtually all its business is overseas. More than ever, though, companies shop around for their listing; a London index is really a measure of the success of the LSE in attracting business. It is not much compensation that this generally means better corporate governance, thanks to higher UK standards.
This is not just a problem for London. There is little reason to track the Nasdaq Composite, either. An index made up 6 per cent retailing, 12 per cent healthcare and half technology is an odd thing to track when there are plenty of technology sector indices to pick from.
The problem is that investors remain attached to exchange-specific indices, creating local liquidity – and a reason for trading. Institutions are shifting to global or regional indices, but until liquidity moves, many indexes will remain local and unbalanced.