London Stock Exchange: well rounded

Investing in a stock exchange is just a geared play on markets, right? That has certainly been the case for London Stock Exchange of late. Its shares have exaggerated moves in the FTSE 100 in four of the past five years. That has also been the case in 2013 - the FTSE is up 9 per cent, LSE is up 41 per cent. First quarter numbers released on Thursday show why. LSE has done very nicely out of investors' renewed enthusiasm for IPOs, while there was also a decent jump in income from secondary market trading.

But that is not the whole story. Chief executive Xavier Rolet has been on a mission to diversify and bring some semblance of dependable growth to LSE's earnings. The acquisition of a 58 per cent stake in LCH.Clearnet, which completed in May, is the clearest example. The rationale looks sound. Regulatory efforts to mandate clearing of over the counter derivatives trades plays into the hands of LCH.Clearnet. Revenues from OTC clearing almost doubled in the first quarter. And €25m of cost savings are promised over the next five years. Countering those benefits are the impending loss of business to rivals (particularly ICE) and the newly announced departure of LCH.Clearnet chief executive Ian Axe. Other efforts to diversify are already paying off. Revenues from FTSE were up a fifth in the period, for example, thanks partly to the growth in index tracking ETFs.

So LSE is a more rounded investment proposition than its name implies. The rating has also moved on. At 16 times forecast earnings, it is the highest for five years. That is a premium to Deutsche Borse on 13, but US rivals such as ICE and CME trade on over 20. For LSE to make it that far it will have to deliver on all the promise of the LCH.Clearnet deal and, more crucially, prove that it can grow even when its own stock market looks wobbly.

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