The UK market is so painfully cheap it is now privately being described by fund managers as offering a generational opportunity for investors.
Now one wants to hear that after a generation of failure now is the time to buy, because anything that can be sour for10 years, then 15 years then 20 years can seem highly likely to keep on going that way. You have to be very contrarian to start to suffer FOMO (fear of missing out) about not being in the market when the reversion to the performance of other kick off. Here is the lack lustre performance of the FTSE100 since 1/1/2000.
It really is extraordinary all the more so since inflation is up by 80% which means the market should sit at 12000 not below 8000. Lets pop the FTSE100 alongside the SP500 and Nasdaq.
This is normalised from 1/1/2000 the peak of the Dotcom and a generation later you can see the difference in value between the London market and the US market. That gap is equivalent to trillions of pounds and the impact of that failure cant be underestimated.
This is of course a systemic issue but there is no easy fix or at least not any that will be taken, unless the angels sing. So when you examine like of like companies in the UK and US you see a gigantic disparity of valuation one that is quite remarkable. An obvious one is Exxon and Shell but the mismatches are practically everywhere you look. Sometimes companies are worth twice what their UK listed peers are worth, sometimes 10 times, sometimes the US has companies, like Google, that the UK cant spawn at all. Yet it gets worse, the last point is purely a knock-on effect where weak markets can drive valuations that drive the kind of venture money investment that in turn drives the creation of startups like of most of the Nasdaq giants started out as. If the UK does magic up a tech giant, like say ARM, it doesn’t end up a trillion dollar Nvida, it ends up being gobbled up and listed later in the US for double.
So the basic investor call is, is the US too high or the UK to low and you can go with both if you like.
What ever you decide, the simplest outcome is that the US will go shopping in the UK for corporate M&A bargains and today sees an example of that kick off. A UK car deale, Pendragon, selling $4.5 billion in cars just got sold for $300m to a US car dealer selling $ 4 billion in cars that has a $8 billion valuation.
However, sweeping that generalisation may be, you can see why a deal like that is an irresistible brgain. Anyone lucky enough to buy recently they enjoyed a 28% pop from this ‘bargain bin’ M&A. (Yes the UK company was profitable and not broke.)
So the M&A pipeline is filling up and pretty soon as deals kicked off after the end of Covid will start coming to fruition and then after an initial trickle there is going to be a flood of UK corporate value being snapped up by US momentum stocks.
Once this gets under way, nothing will be spared, which will push up the index as a whole and give long term holders a series of nice surprises when the deals go public. This perhaps is how the gap gets closed. The UK government has woken up to the looming demise of the relevance of the London Stock Exchange, and appears to be twitching into action, so there is an additional hope that the slump of a generation is about to come to an end.
I’m positioned for that moment and I hope that I don’t have to wait another 20 years for the power of market economics to do its magic. It really seems a glaring opportunity but there still needs to be confirmation that there really is a pipeline of M&A gurgling along on its way. Doubtrs should keep a eye out for it because once the action kicks off its going to roll for a long time.