Seeking good positive returns.
Come rain or shine.
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!
*Free cash flow is money available to investors after capex and working capital have been covered
Chart source: Datastream, Ruffer calculations