Berenberg ups price target on London Stock Exchange

Berenberg has reiterated its ‘buy’ rating on the London Stock Exchange, arguing that listed exchanges are fairly valued, despite concerns to the contrary.

The bank conceded that shares of listed exchanges looked expensive. “It is understandable for investors to be concerned by the sector’s valuation,” it said.

“The average global exchange currently trades on a x22.2 next year’s earnings for growth of 8%. All four exchanges under our coverage currently trade more than one standard deviation above their average valuation over the last decade.”

But the bank’s analysts also argued that the macro backdrop was “historically benign”, with US interest rates at a cycle peak and European authorities set to relax monetary policy, while previous business models had changed.

“The average share price beta of the exchanges under our coverage has fallen by 60% since 2009,” they said. “This more than offsets the increase in equity risk premia. Along with the decline in interest rates, we estimate that the cost of equity has fallen 41% for the average exchange under our coverage.”

The note continued: “Recent market trends have been driven by economic and political factors – trade disputes in particular – that do not directly affect exchanges and, potentially, have depressed the sector’s beta.

"Even if the sector’s market sensitivity returns to historical norms, however, we estimate that current valuations are only discounting average long-term earnings growth of 2.3%. This does not appear demanding given the structure of the industry and long-term trends in global growth.”

Berenberg reiterated its ‘buy’ ratings on the LSE and CME Group, owner of the Chicago Mercantile Exchange, and its 'hold’ ratings on Deutsche Börse and Intercontinental Exchange, owner of the New York Stock Exchange. It also upped the price targets for all four stocks with that for the LSE moving to 6,340p from 5,670p.