Crikey, twice in one week. A positive thought on the UK. Maybe, it’s my subliminal way of keeping the rugby gods happy before Twickenham? It’s certainly not Rishi Sunak’s sole splitting toe-curler of an interview with Grazia – surely the place where political careers go to die or promote blissful dishwasher habits. No, seriously. Anyway, Budget Day comes this week in the UK but that won’t move the recovery dial. No, I’m looking for inspiration elsewhere and, as fortune would have it, we hosted a launch event in London last week. The guest speaker on the night, Chris Johns – author, podcaster, economist, fund manager, strategic thinker with a big following – made the interesting point that, in a year where 4 billion people on the planet are due to vote, the UK might be in a unique position. Its voters will most likely reject the trend of chasing populist pipe dreams.
The 14-year suffering electorate in the UK has already tried populist politics, and it is entirely possible that a curious fixation with ‘taking back control’ and a nostalgia for historical glories could bring the Tory party to an election wipe-out where less than 100 of their Westminster parliamentary seats will survive. That’s what happens when the Dambusters theme music leads to machine-gunning dinghy policies and taking back control doesn’t quite lead to ‘ruling the waves’. In fact, quite the opposite of control, as the nation empties its bowels directly into UK waterways at a pace not seen since Nosferatu Rees-Mogg first walked the cholera-ridden streets of London in 1866, with Nanny. The toilet humour may feel misplaced in a crisis but infrastructure decay is at the root of UK decline, and pre-dates Brexit. The bottom line is that the UK, both in the public and private sector, has been under-investing for decades.
The Institute for Public Policy Research estimates the under-investment in business at $500 billion less than what other comparable OECD countries have invested since 2005. Public sector investment (infrastructure) was a further $200 billon below the G7 average. All in, this chronic lack of investment places the UK 27th out of 30 OECD countries. So, why my optimism? Well, I’m schooled in the financial market orthodoxy that the rear-view mirror is a wealth destructor and that the greatest opportunities can be found at the maximum point of despair and disarray. The disastrous 49-day PM reign of Liz Truss and the international bond market near-strangulation of UK pension funds in September 2022 was possibly that moment. Truss’s recent reinvention as on-stage Tommy Robinson (UK civil court adjudicated racist) cheerleader with MAGA extremist, Steve Bannon, at the fascist CPAC conference merely highlights the passage of populism past the point of no return. Not even the suspended Tory Deputy Chairman, Lee ‘Anderthal’, went that far. However, the financial returns possible to investors in the UK might be about to turn for the better. In our recent “Private Portfolio Thoughts” Newsletter we highlighted a couple of interesting data points:
The Quest quants team at Canaccord are pointing out that UK companies’ level of capital expenditure is at multi-year lows. This means there is plenty of gun-powder to acquire other companies. Also, the machine-learning macro data at Quant Insight is pointing to lower credit spreads (higher lending confidence) driving financial markets right now.
This combination of pent up investment capability and improved borrowing conditions for UK businesses creates a very opportune environment for the purchase of UK companies by other UK companies. One could view it as a capital expenditure ‘sprint’ ie why invest organically when you can buy an existing business, customers and expertise? There are also a few other factors to consider….
Valuation: Mid-sized UK companies which are listed in the FTSE 250 index are trading at 25-35% valuation discounts to other developed markets. Some equity research houses have boldly referred to the UK mid-market as being on ‘emerging market’ valuations of 11-12x earnings multiples compared to US markets on 19x and world developed market averages of 16x.
Currency: Consider the Brexit devaluation of the Great British Peso (GBP) by 15% and a foreign buyer could be looking at a “50% Off, For Sale” opportunity. And, it’s not just us thinking about foreign acquirers…
A 2023 survey conducted by London-based investment bank, Numis, showed that a whopping 90% of FTSE 250 company directors believe UK firms are vulnerable to foreign takeovers due to depressed valuations and a weak GBP. Oh, and then Numis was bought by Deutsche Bank! That’s certainly ‘walking the talk’. However, this is not just an isolated corporate coincidence. There are other headlines signalling a growing awareness of opportunity and interesting company moves:
*Britain Isn’t Such a Basket Case Anymore, At Least To Investors – Bloomberg (March 5th 2024)
*UK Insurer Direct Line Rejects Ageas’s $3.9 billion buyout – Reuters (February 28th 2024)
*Dutch Fintech Bunq moves top exec to UK to lead post-Brexit return – Financial News (March 4th 2024)
*Currys shares soar as Chinese retailer enters takeover battle – The Guardian (February 19th 2024)
*Santander-backed Ebury reportedly eying £2 billion London IPO – Reuters (March 5th 2024)
That last headline is a striking confirmation of two themes we have recently highlighted on these pages. Firstly, Ebury is a UK payments fintech and the UK fintech sub-sector, despite Brexit, remains the best place in the world outside Silicon Valley to attract venture capital. Second, the payments sector within fintech is ‘hot’ and could follow digital processing and social media as the next mega-trillion dollar network. In contrast, the overall UK market has gone cold and lost its “equity culture”. No wonder the CEOs of major UK companies have been pressuring Chancellor Jeremy Hunt to bring some Budget relief or ISA incentives to UK investment. The data is damning.
Pension fund allocations to the UK’s stock market have fallen from 53% of total investment to just 6% in the space of 25 years. In fact, the entire UK market is valued at $3 trillion which is less than the market value of a single US company, Microsoft. This could be viewed as a long-term UK downward spiral but ….a marginal pick-up in M&A, investment and foreign capital inflows could have an outsized ‘FOMO’ impact on perceptions. Think of Japan’s recent resurgence and then consider what might happen to the UK market if investors believe the worst is in the rear-view mirror and the future is investment, not puerile populism. Watch for corporate leadership and action. Then, follow the money.
