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Morningstar | London Stock Exchange Appears Well Positioned, Even in the Shadow of Brexit

London Stock Exchange has transformed itself from a small, regional fixture and frequent acquisition target to a dominant global player in the exchange industry. We think London Stock Exchange has successfully pivoted toward moatier and faster-growing businesses in FTSE Russell and LCH. These two subsegments collectively account for over 50% of the firm's revenue. We expect each to drive double-digit top-line growth. We still see many opportunities for FTSE Russell to disproportionately benefit from the continue trend of growth in passive investing, particularly in the demand for smart beta, multiasset, factor, and ESG products. The global ETF AUM market is expected to exceed $10 trillion by 2022, more than double year-end 2017 figures. This marks an accelerated pace from its double-digit growth over 2010-15. In addition to the growth from passive, we think FTSE’s products will benefit from increased penetration into underdeveloped markets, expansion of distribution channels, and additional asset classes. In contrast to Deutsche Boerse, whose STOXX index products have traditionally only been traded and cleared at Eurex, LSE’s Open Access model allows FTSE’s indexes to be widely available in multiple distribution channels. Furthermore, with the acquisition of the Citi Fixed Income Indices, FTSE Russell’s total assets benchmarked have pivoted away from being exclusively in equities. We think the addition of new fixed-income and multiasset index and analytic products to its offering can drive additional flows and slow any potential pricing pressures. It also allows FTSE Russell to deepen and extend the Citi Fixed Income Indices client base through FTSE’s top-tier sales organization.Finally, we see demand for LCH’s services to continue to be driven by changing regulation and LSE's product innovation. The total notional of interest swaps cleared has continued to grow well in the double digits, and the firm is gaining serious traction in the nascent foreign exchange clearing market. We expect this high growth trajectory to continue for LSE.