Undervalued UK Market

📊 Investing
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While many investors are busy chasing the US, EU, EM & China Market, the UK market has been massively neglected for obvious reasons. I believe this creates a different type of opportunity for investors - no financial advice intended.

4 of my UK stocks have gone or in the process of going PE this year alone and the trend seems to continue in the near future. On average am seeing circa 40% uplift from the time the news is released and this does not take into account any dividend or capital appreciation for duration I’ve held those stocks.

My Metro Bank is up 34% today on the rumour of US private equity firm the Carlyle Group takeover approach. I would imagine there would be better investment returns out there, just not my circle of competence.

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I think the view of the UK has been getting distorted more and more over time.

There has also never been a year with so much outside interest in buying up UK companies. Studies even suggest the UK has been better for it as a result.

It’s a difficult one. Morrison’s and Blue Prism have been sold off this year amongst others.

Personally I think the Uk is a bit like Japan. People concentrate on the main indices and think it’s not a great investment region in general, but look under the bonnet and there are some gems.

Private equity is a difficult space. We can personally invest in private companies directly through the likes of Crowdcube, and the Enterprise Investment Scheme can make it rewarding for the risk.

Personally if looking for private equity, I would leave it to those who should be more specialised investing in that sector. Investment Trusts such as the Chrysalis Investment Trust (CHRY), or Schiehallion (MNTN/MNTC) giving exposure with the ability to buy in/trade out at a point of your choosing.

The problem with the UK indices, is there is too many old money companies that have been heavily reliant on managing their debt, expecting their revenue streams to be fairly consistent. Rolls Royce, BP, Royal Dutch. They are now starting to diversify, but don’t so much have the free cash / war chests to spend that popular US tech companies have built up over the years.

On the opposing end, check out our innovative companies - Starling Bank, the first neo bank to become profitable, Nutmeg that was bought out by JPM, or even Ceres Power, ITM Power and BritishVolt. Should probably mention Ocado and potentially Argo Blockchain as well.

There are good well run Uk companies to invest in that have lower metrics than foreign equivalents which I think is why we are starting to see much more foreign investment.

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I’m only in UK stocks. No exchange fluctuations and no dividend tax. US market is grossly overvalued. Won’t buy US until correction takes place.

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If you see from last year figure, to this date
FTSE250 beats S&P 500. S&P has been running far above pre pandemic level, FTSE 250 although already higher than pre pandemic but it has not gone high enough like S&P 500. So it might be still a lot of room to grow.

Myself, I have already started diverting my Vanguard Lifestrategy to FTSE250 since a while ago and keep allocating the new fund to FTSE250 rather than Vanguard Lifestrategy or S&P500.
I divert my Index fund

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Vodafone drops to it’s 1997 price range, yes todays half year report wasn’t that good but the reaction was overly done imo

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The FTSE 100 comes roaring back and hitting new highs recently, although minus oil & gas and mining stocks the index is still massively under valued PE wise compared to S&P500.

I cant wait till 5 April to get another 20k tax free ISA allowance to unleash

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Tesla and Realty Income are over valued as well.

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I also don’t buy the idea of 60% of the world stock market residing in one country regardless of the rationale.

This Russia - Ukraine War would only lead to gradual decoupling away from the US over the long run, nationalism is going to take the centre stage sooner or later.

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I reckon there are a few little Gems in the UK Market but I am looking at Developed Asia.

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The problem with the FTSE100 is it lacks diversity, and is probably too small. As others have said the FTSE250 is probably a better / more diversified view of the UK economy.

That said like most, the companies are multinational.

How’s this for a comparison starting from 1996?

image

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I just wish there was a better comparison but hard enough finding something that tracks the FTSE250 back to when it started(96).

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Just looking at cross different countries expensiveness

US multiples of -19
Europe 13
Emerging market 12
United kingdom 10

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Is this not where diversity is key. The US/UK/EU companies, those at the top are global. You want to hold a share of all to get a good average return.

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Chrysalis etc are not really private equity. AIC created a separate section for them. And as you can see they have done terrible

https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=GCP&sortid=Name&desc=false

Possible a time to buy?

Investment trusts private equity on the other hand have some long term statistics which show different picture. Still generally undervalued.

https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=PE&sortid=Name&desc=false

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Hard to believe but Japan at one time was 60% of the world stock market.
Its shares did trade on nearly 4 times that of the average developed economy.
It then all came tumbling down. Because it didn’t deserve the rating and the fact that most Japanese company account were lies.
The US is clearly more deserving of being top dog but maybe a little to overvalued.

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Private Equity / Venture Capital. Same thing. Both allow a means to invest in unlisted companies.

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I agree with @JB2 that there is an important distinction between private equity and growth capital as per the AIC’s sectors.

Yes, they both invest in private companies but the likes of CHRY are riskier and focused on a narrow subset of venture capital-style firms.

By contrast, HGT, which is in the private equity sector, generally invests in profitable tech. Others like HVPE and PIN offer broad exposure, including more mature companies.

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Most in private equity own the companies outright or at least have majority control.
Growth capital doesn’t. Moreover they are often not profitable in most cases because growth is all important. Cake tomorrow investments.

When asking for money they decide on there valuation and the growth capital companies give (or not) based on that valuation.
Klarna came back a year later for more money to Chrysalis with a valuation 90% lower than it’s initial valuation.
Growth capital equals jam tomorrow, those investments have taken a severe kicking.

Private equity normally purchase profitable companies improve them and sell them roughly 5 years later.

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There are some exceptions to that. BHS and Debenhams I think are two good ones. They both owned a lot of their own retail outlets, but their buyers sold the retail outlets for cash now in return for rental payments, increasing their operational costs going forward. The increase in operational costs and the decline of the high street contributed to both declines. The Private Equity company I think for Debenhams got out with a profit before the issues became apparent.

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PS presently invested in 3i, HG capital and nbpe.
3i is at par but normally trades on 20% plus premium.

HG capital trades in and out of premium. Average about 5% premium.

NBPE is normally on an undeserved 20% discount. It has a very large amount of vintage investments 2017 2018 2019 all of which should be ready to sell on. Assuming they don’t wait till after the probable recession.
It also has a very decent dividend of 5% assuming it continues paying it it is useful as private equity is very volatile, so less need to sell shares. Bought NBPE 7th February was up 9% but only up 6% today!! I can live with that.

All 3 are direct investors IE they buy and run the companies. There is a view going round that some private equity are buying companies of other private equity and are over paying. Not sure that investment trusts buy companies of other private equity companies.
Either way if it’s correct the direct investors are not buyers but sellers. In other wards if it’s true they will be beneficiaries.
When selling a company the uplift average is 20% above there valuation in the pe portfolio.
3i is in the process of selling a company to another private equity company (not an investment trust) for a 50% uplift!!

@Dougal1984
I am talking about private equity investment trusts were they bought by investment trusts?

Only allowed 8 posts so am also replying to your post above