However cheap stock markets get, the UK somehow manages to stay one step ahead. After a weak market open in Europe on Friday, an unexpectedly lavish stimulus package pummeled sterling, British government bonds and UK-focused stocks. Amid the wreckage, there will be opportunities for strategic buyers. Thanks to Prime Minister Liz Truss and her Chancellor of the Exchequer Kwasi Kwarteng, the “UK is cheap” narrative has gotten another leg.
The currency and bond markets were gripped by fear that policies designed to alleviate the cost-of-living crisis will just stoke inflation and push up rates while saddling the UK with an overwhelming debt burden. In an environment of sharply higher borrowing costs, debt-laden UK stocks suffered especially badly – the likes of commercial real-estate firms and sportscar manufacturer Aston Martin Lagonda Global Holdings Plc.
The FTSE-100 now trades on a forward price-earning ratio of just 8.6. The FTSE-250 index of mid-sized companies (with expected faster growth) is on 10 times, just below European stocks but well shy of the S&P 500’s 16 times.
Investors in UK assets have much to digest. The outlook for domestic-focused companies is especially cloudy. But a broad-based selloff may attract the attention of acquirers on the hunt for more internationally exposed firms caught up in the maelstrom. Not now, but in time. Even before sterling got this low, foreign corporate and buyout bidders were taking advantage of relative dollar strength to pounce on London-listed companies with clear non-UK exposure and durable business models, notably in the engineering sector.
This week saw billionaire Xavier Niel take a stake in telecoms operator Vodafone Group Plc. France’s Schneider Electric SE agreed to terms on its long-awaited bid to take full control of software firm Aveva Group Plc — a clearly opportunistic move given the weakness of the target’s share price. Maybe these are specific situations, but they still reinforce the trend.
There are some brakes on all this. Firstly, bidders will now be wondering if the currency weakness is an overshoot or a trend with further to run. And whatever the valuation attractions of the UK, the non-financial uncertainties facing acquirers are growing. This may be a government that espouses free markets but it inherits a new national security regime that was designed to subject many more transactions to automatic scrutiny.
The UK competition authorities appear determined to establish themselves as a world leader in antitrust enforcement. Add to that the fact that their review process is lengthy, and aspiring buyers may wonder if a move is worth the risk. There is also the possibility that if Truss’s gambit fails, the government changes again. She does not have five years ahead of her like a prime minister voted in by the electorate.
But there will be situations where the stars align for bidders with strong balance sheets able to exploit all this — where a UK takeover target trades relatively cheaper than international peers, where the anti-trust and national security risks are worse for rival suitors and where it’s possible to have some faith in the firm’s longer-term earnings outlook. Some stock owners in Aveva are reportedly pushing back on Schneider’s offer, which landed when the target was looking particularly vulnerable. Many more downtrodden shareholders in the UK market may need to find their spine if other opportunists pounce.
More From Bloomberg Opinion:
• Kwarteng’s Mini-Budget Sets Up Damaging Battle Between Treasury and Bank of England: Mark Gilbert
Britain Goes the Wrong Way on Energy Bailout: Javier Blas
Is Kwasi Kwarteng Up for Saving Britain’s Economy?: Adrian Wooldridge
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Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
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