The U.K. market is so painfully cheap it is now privately being described by fund managers as offering a generational opportunity for investors. No one wants to hear that after a generation of failure now is the time to buy, because anything that can be sour for 10 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 exchanges kicks off. Here is the lack luster performance of the FTSE 100 since January 1, 2000:
It really is extraordinary, all the more so since inflation is up by 80%, which means the market should sit at 12,000 not below 8,000. Let’s pop the FTSE100 alongside the SP500 and Nasdaq:
This is normalized from January 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 can’t 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 to like companies in the U.K. and U.S. 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 U.K.-listed peers are worth, sometimes 10 times, sometimes the U.S. has companies, like GoogleGOOG
, that the U.K. can’t 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 most of the Nasdaq giants started out as. If the U.K. 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 U.S. for double.
So the basic investor call is, is the U.S. too high or the U.K. too low, and you can go with both if you like?
Whatever you decide, the simplest outcome is that the U.S. will go shopping in the U.K. for corporate M&A bargains and today sees an example of that kick off. A U.K. car dealer, Pendragon, selling $4.5 billion in cars just got sold for $300 million to a U.S. car dealer selling $4 billion in cars that has a $8 billion valuation.
However sweeping that generalization may be, you can see why a deal like that is an irresistible bargain. Anyone lucky enough to buy recently enjoyed a 28% pop from this “bargain bin” M&A. (Yes the U.K. company was profitable and not broke.)
So the M&A pipeline is filling up and pretty soon deals that 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 U.K. corporate value being snapped up by U.S. 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 U.K. 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. Doubters should keep an eye out for it because once the action kicks off, it’s going to roll for a long time.