Looking over the pond

Looking over ‘the pond'. UK companies are considering moving their listing to the US

They say the grass is always greener on the other side or in this case, the other side of ‘the pond’.

UK equities continue to trade at extremely low valuations by historic standards, while US equities remain close to a record high. No wonder, more quoted companies are mulling the idea of moving their UK listing or gaining a dual listing in the US.

There is a combination of factors behind the UK’s current level of share valuation from Brexit, economic and political upheaval, the war in Ukraine to interest rates.  By comparison, the US, is the home of the Big Tech companies and particularly the ‘Magnificent Seven’ which have performed strongly so far this year, on the potential of Artificial Intelligence (AI). The UK’s position is exacerbated by the lack of equivalent tech heavyweights in the listed market so, the UK has not been able to capture the limelight to nearly the same extent on the topic of AI. Despite the relative lack of coverage, the UK punches above its weight in AI, ranked 4th in the world against global peers. 

The last time the UK traded at these valuation levels, in a global context, was over 30-years ago. The outflow of funds and low valuation means that the UK, which at one time was 9% of global assets, is currently about half of that weighting. While low valuations have attracted corporate bidders, challenging market conditions have weighed upon the new issue market in 2023, so the pool of listed UK companies has diminished. Corporate broker Peel Hunt estimates, that the number of UK listed small & mid-cap companies has reduced by 100 or 20% in the last five years.

Ultimately, wherever a company is listed, it gets the value it deserves in the long term. This will be due either to its historic growth record and prospects or a takeover approach. Typically, a low valuation suggests a lot of angst is being factored in. By comparison, growth companies and sectors with premium valuations that are priced for perfection can receive a big knock when they fail to meet those high expectations.

All things considered UK equities currently feel very cheap. It just needs something to trigger a fundamental re-assessment by global asset managers of UK equities. Good quality businesses that are cheap through no fault of their own, do not tend to stay that way for ever.

What have we been watching?

China’s economic woes continue to cast a shadow across global financial markets. In addition, the prospect of ‘higher for longer’ interest rates in both the UK and US saw bond yields rise, with Gilt yields hitting a 15-year high and US Treasuries almost touching a 16-year high.      

Troubled Chinese property developer Evergrande filed for bankruptcy protection in the US court as it seeks to restructure its offshore debt. Evergrande has about $32bn in outstanding bonds, collateral, and re-purchase obligations. Property developers accounting for some 40% of China’s home sales have now defaulted including Country Garden, long-considered the more conservative peer of debt-laden Evergrande. The problems in China’s residential property development sector also appears to be spilling over into other sectors, with a leading Chinese wealth management company missing payments on several of its high yielding products.

The economic cost of Russia’s invasion of Ukraine saw the Russian Rouble dip to its lowest value against the Dollar in sixteen months as military spending rises and exports fall. The Russin currency has lost 25% of its value this year, limiting scope to finance imports. The Bank of Russia hiked interest rates from 8.5% to 12% but despite this Russia will struggle to attract capital inflows due to Western sanctions.

 

In the UK, there was mixed news for the Bank of England (BoE). Grocery inflation eased to 12.7% and this was reflected in the July inflation data with CPI dropping to 6.8% from 7.9% in June. Core inflation remains ‘sticky’ and was unchanged at 6.9% in July. While clothing prices fell this was offset by higher restaurant and hotel prices as well as a jump in airfares. Meanwhile, private sector pay climbed to 8.2%. Despite slowing inflation, the strength of wage growth seems likely to steer the BoE in the direction of a further interest rate hike in September. The real yield on 10-year Treasury stock hit the highest level in 15-years.  

 

US retail sales came in above expectations in July suggesting consumers are faring better than expected despite ongoing monetary policy tightening. The Federal Reserve (Fed) released the minutes of its last meeting. While the decision to hike interest rates last month was unanimous and Fed officials continue to fret about inflation, there was a more cautious sentiment around further tightening creeping into member’s views.  A number raised concerns over the risks of overtightening.

 

Japan’s economy grew by 1.5% in the second quarter of 2023, ahead of expectations, helped by strong exports. 

 

China released further disappointing economic data. Industrial output slowed to 3.7%, retail sales growth dropped to 2.5% while fixed asset investment slowed to 3.4%. The unemployment increased to 5.3% and the authorities are to stop publishing ‘temporarily’ the youth unemployment rate which exceeded 21% in June. The People’s Bank of China cut a key lending rate which serves as a benchmark for corporate loans by 0.1% to 3.45%. The market still expects further major stimulus from the Chinese authorities but so far only very modest cuts to benchmark interest rates have been made.

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Brent oil edged back to $85 on the soft Chinese economic data.

Finally, talking of US equities remaining close to their high. Michael Burry, the US hedge fund manager made famous in ‘The Big Short’, the book by Michael Lewis, appears to have made bearish bets against both the US S&P 500 and NASDAQ indices according to his funds most recent 13-F filing. His $1.6bn bet means that Burry has 93% of his portfolio positioned against the US market.

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