The London Stock Exchange Group (LSE: LSEG) plays a central role in enabling companies and governments to issue securities efficiently. It is a company I have often overlooked because the business of stock exchanges is not the most exciting to me. However, not buying this stock 10 years ago today is one of my biggest investment regrets. If I’d invested half of my stocks and shares ISA allowance in it I’d have received an eye-watering return of 1,046%. This is equivalent to over £100,000.
A decade of supersonic growth
There were several tell-tale signs the stock was going to take off that I neglected to act on.
For starters, it is an incredibly long-standing institution. UK heritage brands like this often posses intangibles that maintain its value over long stretches of time. The London Stock Exchange has been around for centuries. It is the epitome of consistency, long-term value and global repute. I believe it is an intangible that gives the stock exchange a premium over others.
Furthermore, the company has reinvented itself more times than that queen of reinvention herself, Madonna. The company is well versed in keeping itself relevant to corporate demands. A timely merger in 2007 with Borsa Italiana (the Milan Stock Exchange), put the Group on the fast-track to success. Since then, timely stakes in clearing house LCH.Clearnet and interest rate swap business TradeWeb have future-proofed its offer.
Is another decade of stellar returns imminent?
After a decade of fantastic growth, the LSE continues to perform well. The stock’s value is in positive territory this year — up 3% in a year when FTSE 100 valuations have broadly declined. The FTSE 100, for example, is down nearly 10%.
I also see the stock as a reasonable downside hedge for market turmoil. The Group benefits from market volatility. Elevated trading volumes contribute to the exchange’s income. Meanwhile, annual earnings are forecast to grow in the double digits.
I expect both of these headline factors to be favourably priced into the share price as time passes.
Headwinds to continued success
However, I do foresee clear headwinds regarding the Group’s growth potential over the long run. A weak pound, Brexit, and a dwindling IPO pipeline are threats to London’s position as a leading equity market. If fewer firms choose to list on the London Stock Exchange, this could limit future growth prospects for the company.
There was already a fear following Brexit that the stock exchange’s reputation as the top global destination for listings would be under threat. So, it has proven. Its share of the total listing proceeds in Europe has fallen 40% in the six preceding years since the vote, according to Bloomberg.
Regret aversion is a negative emotional bias that urges investors to avoid regret, and thus make the wrong decision. I do not want to fall into this trap with the LSE because of my regret of not buying 10 years ago.
However, I am quite positive this is not the case with the LSE. Despite some clear headwinds, I consider it a heritage stock with solid fundamentals. I believe the positives as a defensive long-term growth stock simply outweigh the risks I see.
As such, I intend to buy some shares in the London Stock Exchange before the year is out.