Why we believe it’s time to buy British
For most British companies, the great Brexit saga has undoubtedly pushed the pause button on every kind of business plan. During the three years of political negotiating that the country has experienced since the referendum, management teams have had to try and prepare for an unpredictable outcome.
Capital investment has been on hold, temporary staff have been hired instead of permanent employees, and cash has been allowed to accumulate – rather than being invested in new machinery or expansion drives – because the future is so uncertain. Since the referendum, firms have had to try to continue to do business when they have no idea what trading relations with Europe will be in the years ahead.
A challenging time for UK equities
The result of the 2016 Brexit vote was not correctly predicted. So, unsurprisingly, there was tumultuous reaction in financial markets and within currencies. Since then, UK equities have been one of the world’s least-loved asset classes. For global equity funds, UK equity allocations are now well below historic levels. In the past three years, almost $30 billion has been taken out of UK equities.
Investors have not wanted to buy into the uncertainty that surrounds the UK’s political situation, so the asset class has suffered a dramatic re-rating. The MSCI UK Index – a proxy for the benchmark for our multi-cap UK equity fund – is now around 30% cheaper than the MSCI Global Index across a blend of factors: price-to-earnings ratio, price-to-book value and dividend yield.
We believe there’s only one way to view these immense discounts: as a once-in-a-lifetime buying opportunity or, quite possibly, the sale of the century.
All investors know this is the behaviour they should practice – buy when assets are low and unloved – but it is much harder to do in reality. And, in fact, most investors do the opposite.
Increased corporate activity in the UK equity market
However, corporate investors have not been so shy to take advantage.
Perhaps driven on by fundamentally attractive prices, there has been a surge in corporate activity in the UK equities market. RPC, Inmarsat, Cobham, Merlin Entertainments, Entertainment One, Greene King and British Car Auctions (BCA) – stocks within the FTSE 250 Index – have all received takeover bids this year, underlining their attractiveness.
BCA is the largest vehicle remarketing group in Europe. With around 90% of its turnover generated in the UK, it is a critical support partner that links the entire automotive value chain from manufacturer to dealer, vehicle financier and the end consumer. Because of the company’s exposure to the UK economy, the industry sector within which it operates, and the lukewarm sentiment towards UK equities from investors, the company’s shares have de-rated over time. In our opinion, the shares fell to a price that neither adequately reflected the increasing economic output on offer, nor the underlying fundamental value – sales grew from £235 million in the year ending 4 April 2015, to £3.03 billion in the year to 31 March 2019.
This has not gone unnoticed by the private equity market and, in June this year, BCA received a takeover approach from private equity firm TDR Capital at 243p a share, a 29.5% premium. From the flotation price to the time of writing, the price of BCA equity has risen by circa 60%, outperforming the FTSE All-Share Index by around 50%.
Thinking long term
This is just one example of why, despite the turmoil of Brexit, we are still very much focused on investing in businesses that are UK-listed, but also internationally exposed. We look for the companies with strong, long-term profitability, where equity holders will benefit from investing their capital and the decisions taken by management. We aim to invest in the UK companies that are compounding their earnings and dividends.
Despite the current political uncertainty, it is always worth remembering that the UK’s corporate governance is world leading, contract law and title law are deeply dependable in this country, and the management team of a UK-listed company is usually very accessible to us. That’s why we believe it is always a good time to buy British. And right now may be an exceptionally good time.
 EPFR Global Data; Investors pull billions from UK on prospect of no-deal Brexit, The Irish Times, 2 September 2019
 Morgan Stanley as at 31 March 2019
 Jefferies as at 1 October 2019
Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.