As Alex Savvides, JOHCM UK Dynamic fund manager, points out, the FTSE 100, in parts, is ludicrously cheap. There is not just value but deep value, where he targets companies with management or strategic change taking place or hidden growth.
He says the soaring inflation narrative has made an index of old-world stocks like energy, pharmaceuticals, materials, banks, insurance companies and telecom stocks look more attractive at a time when value is no longer a dirty word.
He adds: “Asset managers now see large, established and highly cash-generative companies with real asset bases and real market positions being aggressively managed for change to fight the successive and often existential threats they might face.
“Regardless of the fear and mistrust with which the market is meeting the new government's economic policies, there is no doubt that the policies are hugely supportive of UK corporate profitability, UK investment and UK growth. So coupled with the record low valuations, I have no hesitation in continuing to back UK PLC.”
Vincent Ropers, TB Wise Multi-Asset Growth manager, says sterling volatility is likely to make UK companies more attractive to foreign investors; a trend that was already appearing prior to the "mini" Budget, courtesy of the valuation discount on UK equities, coupled with the strength of the US dollar.
However, he warns now is not the time to take big bets given any view on FX or bonds can be turned on its head quickly by quantitative easing.
Could mergers and acquisitions surge?
I talked in this column last month about the battering the UK small and mid-cap sectors have taken in 2022, down 28 per cent and 25 per cent respectively year-to-date. Both are now looking incredibly cheap, so I would expect M&A activity to surge from here with a lot of US private equity investors sitting there with huge sums of cash and aided by a strong dollar.
Matthew Tonge, Liontrust UK Micro-Cap co-manager, says it is understandable that the market might be concerned that mid and small-caps in aggregate might be disproportionately affected by the problems faced by the UK’s domestic economy.
He says while the companies they hold are not immune to the contraction, they have been re-assured by their resilience. He adds that pricing power is likely to prove critical in dealing with cost pressures, which look set to persist, with cyclical companies with low barriers to entry and weaker balance sheets set to feel the pain more than most.
