Has Paris really stolen the limelight from the City of London?
In late 2022, the French press exulted at the news that Paris’s market capitalisation had overtaken London’s. While these financial centres have been competing for more than two centuries, Paris faded from view from 1914 to 1985 before enjoying ‘a renaissance‘. We read that it has now topped London as Europe’s biggest stock exchange. But what does that mean?
To grasp this, we first need to get our heads around the concept of market capitalisation, which can be defined as the total value of shares in a particular company listed on a stock exchange. As shares represent the property rights of the companies that issued them, the capitalisation 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 the company could not convert it into money without selling all its shares and thereby tanking them. A rise in capitalisation is therefore only a promise.
It should also be remembered that:
- Not all companies are listed, because although listing allows access to market financing, it entails costs and risks.
- There are other sources of financing than the markets, in particular banks.
- It is quite possible for a company in a given country to choose to be listed on a stock exchange in a different country.
Off-index stocks carry Paris
On 23 June 2016, the day of the United Kingdom’s referendum on leaving the European Union, the London Stock Exchange’s capitalisation amounted to around €2,900bn, compared to 1,750 in Paris. Since then, the pound sterling has fallen against the euro (-6%) and the London stock market index has risen less than the Paris index: 14% for the FTSE compared to 30% for the CAC All-tradable. However, these two effects combined explain only a quarter of Paris’s catch-up.
Understanding the rest will require that we look beyond stock indices to weigh in factors such as market entries and exits, or ‘small’ stocks price variations that are not accounted for by indexes.
