All-weather investing

Seeking good positive returns.

Come rain or shine.

Ruffer LLP
Select Location
UK
Europe
Australia
US
Asia
Middle East
Channel Islands
Rest of world
Type of investor
Individual investors
Institutional
Charity
Family office
Financial planner
Individual investors
Institutional
Charity
Wholesale
Institutional
Institutional
Institutional
All investors
All investors
London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France

Brexit bargains for Christmas?

UK stocks are attractive on a free cash flow basis compared with the rest of the world
The Green Line
Alexander_Chartres
Alexander Chartres
Investment Director

As Christmas approaches, it’s not only the discount retailers bearing gifts at bargain prices: it’s Brexit – more particularly, the political uncertainty hanging over UK plc.

This month’s chart plots the free cash flow* of London-listed stocks against that of global equities. All else being equal, the higher the line, the cheaper and more out-of-favour UK stocks are compared with global peers.

Since free cash flow can fund expansion or acquisitions, pay down debt, and fund dividends or buy-backs, the more you have, the better. Since Britain’s Leave vote on 23 June 2016, British-listed equities have been shunned by global investors. Surveys reveal global fund managers’ allocations to UK stocks are at historical lows.

Yet for those prepared to look through the uncertainty of Brexit, fortune may favour the brave.

What about investors worried by what may happen to the British economy post-Brexit? Four-fifths of the FTSE 100’s earnings come from overseas. For many international businesses which happen to be listed in London, therefore, falls in sterling actually aid profitability.

Furthermore, sterling’s weakness in the aftermath of the referendum has encouraged a range of suitors – both foreign and domestic – to drive M&A activity in the FTSE 100 to record levels in 2018.

Earlier this year, for example, Japanese pharma firm Takeda successfully bid for UK-peer Shire. In September, US telecommunications giant Comcast paid £30bn for Sky, whilst only a month earlier, soft-drinks titan Coca Cola (the brand that turned the formerly green Father Christmas red) splashed out nearly £4bn for Whitbread’s Costa Coffee. The Coke bid was just the caffeine shot required, and the shares pepped-up 14% in a day.

Last month, we wrote about the ‘golden opportunity’ presented by the huge disconnect between prices of gold and gold mining shares. London-listed Randgold was one stock we acquired as a result. This proved fortuitous when Canada-based Barrick promptly swooped for Randgold to create the world’s largest gold miner. For Barrick, sterling’s fall burnished the miner’s attraction.

With sterling still at historically depressed levels, there could be more foreign-led M&A activity to come. Of course, if the politicians serve up a turkey of a deal rather than a Christmas cracker, prices may stay at bargain levels a while longer!

The jaws of a golden opportunity
October 2018: Gold mining equities offer compelling value compared to the shiny metal
Read
The tortoise and the hare?
September 2018: Japan retakes title of second-largest stock market from China
Read
The corporate credit canary
August 2018: The risk of soaring corporate debt is being ignored
Read

*Free cash flow is money available to investors after capex and working capital have been covered

Chart source: Datastream, Ruffer calculations

London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France