Adrian Gosden, Investment Director, UK Equities, suggests there are compelling opportunities for investors as a result of the major uptick in mergers and acquisitions (M&A) and corporate activity in the UK equity market.
Since the 2016 Brexit vote, we have seen uncertainty dent confidence in UK companies and pile on pain for investors in the asset class. After five years out of favour, it appears the UK market is firmly back in vogue. We are starting to see signs that private equity firms want to press the pedal given the prospect of access to ‘free money’ forever is dissipating. Over 200 transactions took place in London over the last year. Private equity giants made headline-grabbing bids for Wm Morrison at the start of July. Regardless of whether or not a deal comes to fruition, this is an example of the flurry of bidding activity in the UK equity market at the moment.
Over the past five years, the UK market has devalued versus every other global market. This difficult period for the asset class is the result of both idiosyncratic events – the extended indecision over Brexit; the UK’s poor record managing the Covid-19 pandemic ahead of the vaccine rollout; and the dividend bonfire of 2020 – and the structural realities of the market – its lack of large-cap technology; large sector exposure to financials and oil; and a perceived lack of growth. In combination, these factors have proven insurmountable for many global investors, pulling aggregate valuations to 50-year lows versus the MSCI World Index average. 2020 encapsulated an even more dramatic divergence for the UK’s performance, with investors in the FTSE 100 Index losing 10% relative to a 40% return from the Nasdaq Index.
Since the Brexit deal was struck on Christmas Eve 2020, many domestically-listed companies have resumed paying dividends and the highly successful vaccine rollout continues apace, changing the backdrop quite dramatically. With some of the major hurdles to confidence in the UK now removed or abated, the flood gates have opened on corporate interest and M&A. Even last year, following the liquidity crisis during March and with large swathes of the economy shut down under lockdown restrictions, 45 deals worth USD 47 billion completed in London. If activity and interest so far this year is anything to go by, we expect aggregate deal flow to be significantly higher in 2021, particularly if the scale of bids continues to push higher.
In the past few months alone, we have seen several buyouts including US group KKR & Co’s swoop for John Laing and Clayton, Dubilier & Rice’s offer for UDG Healthcare. Spanish yacht painting firm GYG and Alternative Investment Market (AIM)-listed software company Proactis have also been targeted by potential suitors. Bids are coming in thick and fast right across the market cap spectrum on a sector-agnostic basis. In addition, we are seeing activist shareholders taking stakes in some large UK-listed companies and pushing for change. Glaxo is being pushed hard by Elliott Management, while BT and British American Tobacco have also gained significant new shareholders. These companies are materially undervalued versus global peers and the pressure is on management to turn that story around.
Corporate activity could well play a key role in many UK turnaround stories both this year and over the longer term, but it is critical that investors continue to play an active role in ensuring bids are genuinely value accretive and likely to be additive for all stakeholders. Many bidders are prepared to buy companies off the London market and trade them on, creating opportunities for active managers. In our view, the next 12-18 months present a once in a generation opportunity for UK equity market investors.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.