A takeover offer for Talktalk Telecom Group PLC (LON:TALK) and the pulling of a proposed GBP500mln flotation of the Tellworth British Recovery & Growth trust, indicates the simultaneous interest and lack of interest in UK stocks right now.
The FTSE 100 is down 21% in 2020, still below levels from 2007 and 1999 and some might also say increasingly pointless, while the FTSE 250 is down 18% this year though up around 50% since its highs pre-global financial crisis.
One analyst suggested FTSE investors on the whole were “throwing the baby out with the bathwater”, while another that there was a “contrarian buy signal” for UK equities.
There are fundamental buy signals for UK stocks as well.
Many UK investment companies’ shares are trading at double-digit discounts to their net asset value.
Analysis of the UK’s listed companies compared to overseas peers by asset manager Star Capital shows a cyclically-adjusted P/E of less than 13 for UK PLC versus 32 for US companies, 19 for Japan; 18 for France and 17 for Germany and 16 for emerging markets.
With many UK companies screaming value, clearly there have been some people listening, with takeover bids in recent weeks for William Hill (LON:WMH), G4S (LON:GFS), Hastings (LON:HSTG) as well as today’s offer for TalkTalk.
“I guess there is still very little positive flow into UK equities generally because of multiple headwinds, cyclical-weighted indices, Brexit, slower recovery than elsewhere, etc etc etc,” said Neil Wilson at Markets.com.
“But because of that there are some companies trading way below where they ought to be – investors have thrown a few babies out with the bathwater and private equity/foreign firms are scooping them up for a song.
“There are some stocks that shouldn’t be down just because of broad under weighting of UK.
William Hill is a good example, he says, as the bookmaker is structurally well positioned to tap the opening up of the US gaming market and had been trading at a discount partly because of investors shunning UK equities and some sector-specific concerns.
While many retail investors may be twitchy about the UK’s prospects, plenty of others in the corporate world appear to be taking the longer view that “once the UK’s future outside the EU is decided and the Covid crisis has subsided, Britain’s economic outlook will be brighter”, says Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
Some, she points out, like Caesars Entertainment’s with William Hill, plan to strip out the more successful overseas facing parts of the business and offload the domestic operations, to insure against a much harder and slower UK recovery.
“A significant slice of the M&A activity also appears to be driven by private equity firms who have been able to raise large sums thanks to ultra-low interest rates and now need a home for those assets.”
However, while the pulling of the Tellworth investment trust after failing to attract sufficient money from investors to even reach the minimum funding of GBP100mln, is an indication of the lack of interest from investors in the UK stock market, Russ Mould, investment director at AJ Bell, said this could also be a buy signal for some investors.
“It is precisely this lack of interest which will appeal to wilful contrarians, who will assert that this means there are bargains to be had,” he said.
“The ideal stock selection offers the combination of downside protection and upside potential and that comes from paying a lowly valuation and usually by buying when no-one else is interested.”
What could change sentiment on UK stocks?
He said the recent bids for the likes of TalkTalk and William Hill suggests that there are plenty of people who do think there is value to be had in the UK stock market “but the question is what will change perception of UK equities and make investors want to add to their exposure”.
A rebound in profits and dividends from the coronavirus crisis trough earlier this year should help, he suggested.
Looking at the individual forecasts for each of the FTSE 100 constituents, analysts are currently expecting a sharp rebound in pre-tax profit from 2020’s GBP122.2bn to GBP174.2bn in 2021, though most of this is expected to come from the oil & gas and banking sectors.
“If there is a strong global economic recovery, thanks to a vaccine, fiscal and monetary stimulus or the virus simply becoming less potent, then the UK could well be a very interesting place to invest,” said Mould, “especially as FTSE 100 looks good value on an earnings, book value and dividend yield basis – plus sentiment toward cyclicals, and especially oils and banks, is well-and-truly washed out as investors fall over themselves to pay ever-higher multiples for growth names like the big US tech stocks.”
However, assuming the pandemic lingers and drags on the economy, the optimistic forecasts for 2021 would be worthless.
Moreover, the government’s flaky handling of the coronavirus and the effects of Brexit make the UK a very uncertain place to invest as a whole.
Indeed, global investment guru Mark Mobius recently described the UK as “beginning to behave like an emerging market in terms of political uncertainty. The political situation has deteriorated, with more polarisation and less reliability in general.”
But as the spate of recent M&A shows, there remain many very good and very attractive companies for stock pickers.