Investec: Come new year, confidence in battle-hardened British businesses will return
It is no secret that global investors have been underweight on the British stock market in recent years.
Some have taken a cautious, “wait and see” approach as the economic and geopolitical fog clears, while others highlight more fundamental problems, namely a lack of high-quality technology and high growth businesses poised to thrive in the post-pandemic world.
Whatever the reason, the fact is that British stocks are trading at far lower multiples than their global counterparts, a discount set to begin unwinding in 2022. Next year, the price-earnings ratio of the FTSE 100 is estimated at around 12x versus 22.5x for the S&P 500.
The UK remains the cheapest developed market in the world, and this has created an image of the UK as a value – or even “deep value” – play. In other words, an opportunity to pick up solid, if unspectacular businesses at a bargain price. This value has clearly sparked the interest of private equity with a number of public to private M&A deals announced over the last year, a trend we expect to continue until the price discount narrows.
At Investec, we recently held our annual Best Ideas Conference, at which we brought together 320 global institutional investors and 75 mid-to-large cap corporates from the UK. Over three days, companies and investors talked through the key issues facing the market.
The impact of inflation, the tight labour market and the future of corporate ESG strategies are all central to the future of the UK economy. From talking to investors at the Best Ideas conference, there confidence in the recovery of British businesses and industry.
But above all, experienced, battle-hardened management teams were what investors were looking at. During the pandemic, well-run businesses that were already leaders in their sectors have been able to consolidate their competitive advantages. The strong have got stronger and will continue to get stronger. These companies are much more than a value play; they are industry leaders whose navigation of the pandemic should make investors take note, particularly as competitors struggle to keep up or, worse, fall by the wayside.
Balance sheet sustainability, reliable profits, and resilient governance – these are the characteristics of “quality” stocks. And yet the general caution towards the UK market means that they are treated with the prudence usually reserved for “value”.
For investors, this is a fantastic opportunity. Companies who have weathered the storm in the UK are as sold and resilient as anything in more favoured markets. Indeed, an irony of the perceived split between the US and the UK is that plenty of these hardy UK companies are themselves thriving in the US.
For all the caution and value talk, confidence is beginning to turn. Investors are gravitating towards “risk off” firms with strong balance sheets, earnings predictability, and great management teams. It seems those previously neutral or underweight on the UK are moving into the new year with a glass half full.