Open for business and up for sale

Brexit opportunities 20% off
UK Technology Company and FTSE constituent ARM Holdings is being taken over in a record breaking £24bn deal. In recognition of the takeover our new Prime Minister, Theresa May, said on Monday, that she had personally called the chief executive of Japanese company SoftBank about the takeover of the UK’s only global software company and our most successful technology company, to congratulate him on the deal.

Our new Chancellor, Philip Hammond, was quoted ‘Britain has lost none of its allure to international investors’ … ‘Britain is open for business – and open to foreign investment.’

Strong messages and well-meaning comments at a time of much uncertainty within the UK economy. The new government faces a series of challenges as we tread warily into the post Brexit world. Confidence is clearly a big issue and we need to avoid talking ourselves into recession.

However compelling the logic behind the acquisition, no doubt the ramifications of a weak Pound against the Yen, tipped the scales. Sterling has fallen 21% against the Yen so far in 2016. Post the 23rd June, on the face of it little has immediately changed in our day-to-day lives – aside from the slide in our currency. The stock market movements following the referendum have created a number of valuation anomalies. Globally diverse consumer companies – the likes of Unilever and Reckitt Benckiser have seen a currency related re-rating. Whilst many UK domestic facing stocks, have experienced selling pressure, notably the likes of the banks, retailers and housebuilders. Note the disparity in performance between the FTSE 100 and the FTSE 250 from the date of the referendum, +5.6% vs -2.7% respectively.

So where does this leave investors? The weakness of the pound has created a ‘for sale’ sign over the UK, even for UK domestic focused businesses. China’s wealthiest man, is acquiring the Odeon Cinema chain for £921m, while South African retailer Steinhoff is acquiring Poundland for £597m. Clearly not in the same league as ARM but nonetheless we believe this is the start of a trend. There is pressure on the Bank of England to lower interest rates. With sterling likely to remain weak the worst case scenario is that this should support current UK equity valuation levels.

An additional benefit of the pounds weakness is a ‘dividend windfall’. Investors can expect a £4bn currency boost to the value of dividends for the year ahead. We estimate that 40% of the dividends paid out by UK companies are now in Dollars or Euros. Furthermore a record number of companies paid ‘special dividends’ in the second quarter of this year.

We have every sympathy with Hermann Hauser, a founder of ARM, when he considered it a ‘sad day for technology in Britain’. However, takeover appeal that has been spurred on by a weak currency with the added bonus of rising dividends, paints a far from gloomy picture for our stock market.

Headline performance has been sourced from Proquote.

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This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

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