Multilingual content from IBKR

Close Navigation
Learn more about IBKR accounts

Why Is the UK Investment Climate So Hot Right Now?

Posted October 6, 2021 at 1:33 pm
Rory Bateman

UK companies have shrugged off the gloom of recent years and have become the target of considerable interest from international buyers. Meanwhile, the surge of new listings shows no sign of abating.

Last year, as the pandemic unfolded, UK equities were among the worst affected equity markets globally. At the time, we believed the ‘Great British Sell-Off’ would eventually attract international interest, particularly when the Brexit overhang (and hence political uncertainty) was removed.

This dynamic has indeed materialised, as illustrated by the significant number of take-private bids (19 bids for 17 companies, according to Refinitiv data as at 10 September) from corporates and private equity firms that have occurred year-to-date.

In particular, a number of these bidders have been overseas buyers. A high profile example is Fortress Investment Group and Clayton, Dubilier & Rice’s separate bids for supermarket chain Morrisons, which culminated in this weekend’s auction.

Why are overseas investors attracted to the UK equity market?

Last year’s sell-off and greater clarity on Brexit are not the only factors attracting foreign capital to the UK’s shores. It is well known that UK equities have traditionally traded at a valuation discount relative to global equities, with the gap widening as a result of the onset of the Covid-19 pandemic.

The discount versus the US, for example, may be partly attributable to the UK’s much lower exposure to the high growth technology sector. However our colleagues recently showed that a material discount exists across nearly all sectors and industries, which is likely to explain overseas investors’ interest. It also suggests that such interest could continue.

A continued weakening of sterling relative to the US dollar since 2016 has underpinned a “double discount”. Combine all this with an easing of financial conditions, expected strong GDP growth, and a vaccination roll-out programme that was initially ahead of many other countries, we believe these are reasons that explain why the UK equity market has been one of the best performing stock markets of 2021.

Some caution warranted on M&A surge

While we believe that continued overseas interest could continue to be positive for UK companies, we also recognise that in some cases there are reasons to be cautious too. It appears the government is also cognisant of this.

The UK has historically been perceived as having an easier merger & acquisition (M&A) climate relative to other parts of the world; however the regime underpinning the new ‘National Security and Investment Act 2021’, is expected to come into force on 4 January 2022.

The Act is set to dramatically expand the government’s powers to scrutinise investments, particularly those involving the seventeen protected industries mentioned within it, such as advanced robotics, defence and cryptographic computing. We are sympathetic to the rationale behind the Act, which according to the former Business Secretary, Alok Sharma, was to “close the back door” to hostile actors targeting sensitive businesses and assets in the UK.

The IPO landscape is also hotting up

Almost counterintuitively, while the UK stock market has seen a record number of intended take-privates so far this year, it has also seen a record number of firms that have successfully publicly listed, driven by rebounding valuations.

Companies such as video games firm Tinybuild and consumer review website Trustpilot Group, which are incorporated in the US and Denmark respectively, sought the UK as their primary listing when each became a public company earlier this year.

The Financial Conduct Authority is in the process of implementing the recommendations made under the recently concluded ‘UK Listing Review’ (chaired by Lord Hill), aimed at increasing the attractiveness of the UK public markets to overseas corporates as a place to list. When completed, we believe this could serve to underpin the buoyant IPO market in the UK in the future.

Do investors risk missing out?

The ebullient takeover and IPO landscape suggests corporates and private equity investors have confidence in the UK, meanwhile not all investors appear to take this view.

Investors often perceive the UK stock market as home to “old economy”, low growth industries. But we think the small and mid cap space in particular is home to some dynamic firms with exciting opportunities to grow and innovate.

The recent spate of IPOs demonstrates a diverse set of new companies joining this part of the market. We hope such listings will encourage investors to view UK shares with a fresh perspective.          

A version of this article was first published in Investment Week in September 2021. Any company references are for illustrative purposes only and are not a recommendation to buy and/or sell, or an opinion as to the value of that company’s shares.

The article is not intended to provide, and should not be relied on, for investment advice or research. 

Originally Posted on October 4, 2021 – Why Is the UK Investment Climate So Hot Right Now?

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Disclosure: Schroders

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realized. These views and opinions may change.  Schroder Investment Management North America Inc. is a SEC registered adviser and indirect wholly owned subsidiary of Schroders plc providing asset management products and services to clients in the US and Canada.  Interactive Brokers and Schroders are not affiliated entities.  Further information about Schroders can be found at Schroder Investment Management North America Inc. 7 Bryant Park, New York, NY, 10018-3706, (212) 641-3800.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Schroders and is being posted with its permission. The views expressed in this material are solely those of the author and/or Schroders and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.