The U.K. market is in the middle of its customary summer lull. The “sell in May and go away” meme still holds true in the U.K., where the ruling classes in effect mirror the public school holiday timetable and enter a period of “skiving off.” This means things go very quiet. The world does not stop turning of course, but the rotation of the city of London definitely slows, which can’t be helpful in the post-Brexit world where the city is doing a very good impression of a financial center in steep decline.
All is not lost of course, yet.
Meanwhile the valuations of the big caps in the U.K. are extremely low. The best way to evaluate this is to adjudge all business being equal stock indexes in similar nations should track and if they don’t something systemic is occurring. So here is the U.S., France, Germany and the U.K. over a strategic length of time.
So here is progress since the Covid crash:
Here we have relative performances since the global financial crisis:
And for us oldies how things have panned out since the dotcom crash:
It just occurred to me a commonality! I have considered the link to the U.K. and French transaction tax, which the French have been moved to drop substantially in recent times, but now I wonder if these outcomes are down to a nation’s penchant for taking the summer off. We all know the French love their summer holiday and while the U.K. behavior is not as famous as that of the French, these days it seems very similar.
However, whatever the reason, the charts above show that shares in the U.K., if you believe apples are apples, are very undervalued in comparison to the U.S. and Germany. For example, I reckon this is broadly measurable as U.K. stocks being half price when put next to the U.S. equivalent.
So this suggests that foreign companies should be feasting on takeovers in the U.K. They are not.
So this could well be a great time to get in ahead of a M&A explosion.
What is holding it back? My guess is that the world is still spinning back up from Covid and only now are the M&A processes kicked off by the end of Covid near to breaking cover.
Vodafone agreed to merge with CK Hutchinson’s Three network. This is a biggie! It is also the first international megadeal, albeit the companies involved are U.K. based. Three’s parent is Hong Kong based, so it involves the sort of international interaction made next to impossible until the world got back into airplanes.
It’s a laggy world these post-Covid times of disruption but this might just be the first sign that an obvious takeover binge of cheap U.K. blue chips is about to hit.
As a holder of Vodafone and a lot of painfully cheap blue chips I await in eager anticipation. These companies can self-fund their acquisition cost if they can be convinced into ceding their enterprises to higher valued suitors because their dividends powered by cashflows are so high that they cover their own price tags.
It’s a shame really, but if Wimbledon comes ahead of your work what can you expect? The French solution is to just say no to embracing takeovers and if that comes to London that will definitely seal its fate.
Read the full article here
