Corporate buyers can’t get enough of UK assets, so why are investors so pessimistic?
- The Sainbury’s/Asda tie up shows demand for UK assets among corporate buyers
- This is in contrast to investors, who are very negative on UK assets
- However. there are few catalysts in the short-term for investors to realise the value in UK equities
Last week’s tie-up between Sainsbury’s and Asda was symbolically important. Not just because it finally suggested much-needed consolidation in the retail sector, or that it supported an ailing FTSE 100, but because it showed that there is demand for UK assets among corporate buyers.
UK companies are widely unloved by investors. Fund managers who have a choice have parked the UK firmly in the ‘too difficult’ bucket and pessimism toward U.K. equities at all-time highs. Richard Buxton, chief executive of Old Mutual Global Investors, recently said: “No-one wants to know about the U.K. Yet not a week goes by without someone wanting to buy a U.K. company.”
Admittedly, much of this is concentrated in the under-pressure retail sector - Tesco’s £4 billion takeover of Booker; the Co-operative Group's £140 million takeover of convenience store wholesaler Nisa, plus, now, Sainsbury’s and Asda. But there is also the battle for Sky, GKN, Fidessa. British assets are clearly held in greater esteem by corporate buyers than by investors.
There are a lot of domestic deals going on as well – UK companies recognising the value in their peers. The volume of U.K. domestic deals surged to $68 billion (£50.3 billion) in 2017, up from $34.3 billion in 2016. Particularly notable were the number of deals between British groups, which leapt from 1,480 to 1,681, the highest level since the Global Financial Crisis.
Will investors wake up to the value in UK equities? Probably not in the short-term. Economic statistics continue to decline and even though some economists are predicting a more buoyant period ahead as wage growth starts to outstrip inflation once again, it takes a long time for investors to change their views.
Nevertheless, UK assets are clearly considered cheap by corporate buyers, certainly relative to the rest of the world; add in the weakness of Sterling and they look extremely cheap. It may take time for investors to recognise the value in UK equities, but they provide a contrarian opportunity for those willing to run a risk on Brexit.