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Sterling’s downward decline has turned Britain into a happy hunting ground for US investors looking for super cheap deals.
Private equity players are scaling up companies with a track record of innovation, while Goldman Sachs and other banks are picking up runaway assets from pension funds.
This state of affairs can make you depressed and furious. But it would be illogical for private investors who can afford to ignore the opportunities that may present themselves, despite the threat of what a senior City boss calls “the worst financial environment of my career.”
Companies large and small in various sectors are beginning to be seen as attractive counterplay by fund managers.
These professionals feel that sentiment can suddenly turn. They also argue that companies in the ’50 percent Club’ – whose shares have been in serious trouble this year – may have fallen disproportionately.
Merchants investment trust manager Simon Gergel says good companies, with robust balance sheets, can be sold alongside companies that are more challenged. Cyclical companies – the consumer, financial services and industrials that are more vulnerable in a harsh environment – are pricing in a painful recession.
He says, “Even if we see a sharp decline, many companies offer solid value at two to three years and have robust balance sheets.”
Jonathan Brown and Robin West, managers of the Invesco Perpetual UK Small Companies Trust, have taken stakes in companies whose shares have fallen by more than 50 percent. For example, XP Power, a power controller specialist, is down 70 percent.
Other purchases from the duo include stockbroker AJ Bell, whose shares are down 22 percent, auction technology down 51 percent and GBG, the identity software group, down 41 percent. They argue that pursuing this strategy can leave confidence “well positioned for when the market flips.” One factor that could hasten a rebound is a wave of acquisitions.
The lists of discounted offers that are said to be in the crosshairs of the bidders are essential reading.
You can lament private equity predators, while still getting a kick out of the words “bargain” and “takeover target.”
Quest, a division of investment bank Canaccord Genuity, names FTSE 100 components such as BT, packaging group DS Smith – which announced better-than-expected results this week – sports betting specialist Entain and Vodafone. French entrepreneurs Patrick Drahi and Xavier Niel are looking at BT and Vodafone respectively.
Quest’s FTSE 250 picks include analytics firm Ascential, cybersecurity firm Darktrace, Greggs, gaming software specialist Playtech and MoneySuperMarket.
The other FTSE 100 companies in the crosshairs of potential predators include Burberry, rumored to be one’s must-have luxury purchase, and Dechra, the veterinary supplier hit by a slowdown in pet ownership. . Renishaw, the engineer, is a popular FTSE 250 pick.
It is likely that you own some of these FTSE 100 companies, either directly or through funds. But perhaps there is more excitement in the FTSE 250, where, as David Henry of asset manager Quilter Cheviot argues, there could be more mergers and acquisitions (M&A) taking place given the size of the companies involved.
Henry adds: ‘The traditional thinking is that the FTSE 100 benefits most from a weak pound as 79 per cent of its revenue comes from outside the UK.
“But the companies in the FTSE 250 get 60 percent of their revenues from abroad. “The FTSE 250 index is down about 17 percent this year, meaning mid-cap stocks are trading at a multiple of ten times next year’s earnings.”
The flood of alarming economic news may make you want to flee the markets. October can be a disastrous month for stocks, as Clive Hale of the consulting firm Albemarle Street Partners reminds us.
The 1987 crash began to unfold on October 19, a birthday that will be on our minds as we speculate about the fiscal plan to be presented on October 31, Halloween, by new Chancellor Jeremy Hunt.
To feel less anxious, I took stock of my portfolio. I have concluded that I have too little exposure to smaller companies, although I am aware that there is a lot of risk in this area at the moment, as shown by the Invesco Perpetual UK Small Companies Trust. The shares are discounted by 17 percent to the net value of the underlying assets.
AJ Bell, Fund Caliber and interactive investor rate funds such as smaller companies TB Amati UK and smaller companies Liontrust UK.
Amid the brutal repricing happening in the markets right now, it’s hard to see small (or anything else) as beautiful, but international investors may have a different opinion.
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