Why we believe it’s time to buy British

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.[1]

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[2] across a blend of factors: price-to-earnings ratio, price-to-book value and dividend yield.

 

Unearthing opportunities

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[3], 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.

 

Sources:

[1] EPFR Global Data; Investors pull billions from UK on prospect of no-deal Brexit, The Irish Times, 2 September 2019
[2] Morgan Stanley as at 31 March 2019
[3] Jefferies as at 1 October 2019

 

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