Has the location of Paris really dethroned the city of London?

Cocorico: On Monday, November 14, the French press hails the market capitalization of Paris, which has surpassed that of London. Although these financial centers had been rivals for more than two centuries, Paris experienced a long eclipse from 1914 to 1985 and finally saw the “possibility of rebirth”. Now we read that he will “dethrone” London. What is the meaning of this?

Before asking how Paris outperformed London and how we can interpret this phenomenon, let’s start by explaining what market capitalization is. Market capitalization is the total value of shares listed on the stock exchange. Because stocks represent the ownership rights of the companies that issue them, stock market capitalization measures the value of the respective companies.

But 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. Therefore, the increase in capitalization is only a promise.

And in this regard it is necessary to remember that:

  • not all companies are listed because, although listing provides access to market financing, it brings costs and risks;

  • There are sources of finance other than markets, especially banks,

  • it is quite possible for a company from a particular country to choose to be listed by a stock exchange located in another country.

However, these reasons are not enough to explain the recent dynamics of the Paris and London stock exchanges.

Non-index stocks carry Paris

On June 23, 2016, the day of the referendum on leaving the European Union, the capitalization measured in euros in London 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 market index has advanced less than the Paris index: 14% for the FTSE, 30% for the CAC 40. However, these two combined effects explain only a quarter of the holdings made by the Paris Stock Exchange.

The remaining three quarters are related to changes outside the scope of the indices. They are explained either by market entries or market exits, or by changes in the price of “small” stocks that are not taken into account by the indices.

The volume of inflows/outflows appears to be very limited for Paris (less than 5 billion per year, with a slight positive balance) and more significant for London. Across the channel, losses due to acquisitions still predominate, despite greater launch volume: on July 18, 2016, Japan’s SoftBank bought microprocessors maker ARM for £24 billion, so it withdrew. Others came later, but the net flows total less than 5% of the difference between London and Paris, so almost three-quarters are due to changes in stocks outside the indices and therefore in other countries’ securities. Most small businesses growing faster in Paris (+150%) than in London.

If we take a closer look at the list of companies presented in Paris, we will see that not all of them are French: for example, Be-Bô is a start-up in the health sector, Compuestos, in Geneva, is a Spanish specialist in plastics. etc. However, these two cases are different: the first one corresponds to an IPO in Paris, and the second corresponds to an additional listing in Paris of a company previously presented on the Madrid stock exchange. But then, should Compuestos capitalization be calculated for Paris or Madrid?

Let’s calculate for Paris the shares owned by French residents as usual: why not include all foreign shares owned by residents in the capitalization of the place, even if the relevant shares are not actually listed (i.e. traded in real time) on the stock exchange?

Under these conditions, London clearly outperforms Paris. Indeed, the City has a special infrastructure called CREST: acting as an international securities depository, CREST issues digital certificates representing foreign shares for British residents. When all foreign-listed stocks are taken into account, UK resident capitalization is $6,200 billion, compared to $3,700 billion for mainland France. Financial Times. The difference is mainly explained by pension funds whose assets in 2021 are less than $100 billion in France.

Additional “services” of the city

However, the financial center is not just a stock market, debt securities also represent a significant capitalization: $128,000 billion at the end of 2020, of which Paris accounts for less than 4%, which is slightly more than London. On the other hand, the most important market in terms of volume is undoubtedly the foreign exchange market: London accounts for more than $3,700 billion in daily transactions, and Paris accounts for 38% of global activity with $200 billion. And more generally, in terms of financing, the London market plays a central role, as a large number of international contracts are drawn up under British law with law firms (law) English.

For example, the first sukuk (Shariah-compliant investment certificates) were vehicle-based contracts issued by an American company to enable GE Capital (a financial subsidiary of American General Electric) to purchase an airline fleet. ad hoc It is listed on the London Stock Exchange and pays a periodic dividend in London. Ships, buildings, containers, works of art: for all these assets, London firms know how to draw up a contract that allows them to be acquired under a favorable tax regime in the chosen territory (for example, a Jersey trust or company). ad hoc Bahamian) by arranging the appropriate financing. In comparison, Paris offers mostly traditional financing tools and no specific legal regimes.

It is because of these auxiliary “services” that London has ranked second among the financial centers of the world, far ahead of Paris since the post-war period. London still employs over a million people in the financial sector, 25% more than France. But since Brexit, the gap has narrowed: it’s “Brexode”.

However, we may wonder what growth implications this trend will have for the rest of the economy. Remember that Germany, whose GDP is 40% higher than France’s, has a market capitalization 40% lower. More than an opportunity to rejoice, the market’s newfound appreciation for France’s economic future therefore gives us an opportunity to remind us that the value of companies is above all based on an implicit social contract.


through Pierre-Charles PradierLecturer in Economics, LabEx RéFi, Paris 1 Panthéon-Sorbonne University