Get ready for the Great British Fire Sale

Get ready for the Great British Fire Sale

As cheap as the stock markets are, the UK somehow manages to stay one step ahead. After a weak market opening in Europe on Friday, an unexpectedly rich economic stimulus package hit sterling, British government bonds and UK-focused stocks. Among the debris, there will be opportunities for strategic buyers. Thanks to Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng, the ‘UK is cheap’ narrative has been given another leg up.

Currency and bond markets have been dominated by fears that policies designed to ease the cost-of-living crisis will only fuel inflation and raise interest rates while burdening the UK with a crushing debt burden. In an environment with much higher borrowing costs, debt-laden U.K. stocks suffered particularly – such as commercial real estate companies and sports car maker Aston Martin Lagonda Global Holdings Plc.

The FTSE-100 is now trading at a forward price-to-earnings ratio of just 8.6. The FTSE-250 index of mid-caps (expected to grow faster) is 10x, just below European shares, but well short of the S&P 500’s 16x.

Investors in UK property have a lot to digest. The outlook for domestic companies is particularly bleak. However, a broad sell-off may attract the attention of buyers looking for more internationally exposed companies caught in the vortex. Not now, but in time. Even before sterling hit this low, foreign entrepreneurs and takeover bidders were taking advantage of the dollar’s relative strength to pounce on London-listed companies with clear non-UK exposure and resilient business models, particularly in the engineering sector.

This week billionaire Xavier Niel took a stake in telecommunications company Vodafone Group Plc. France’s Schneider Electric SE has agreed to terms in its long-awaited bid to take full control of software company Aveva Group Plc — a clearly opportunistic move given the weakness in the target’s share price. Maybe these are specific situations, but they still reinforce the trend.

There are some brakes on all of this. First, bidders will now be wondering whether the currency’s weakness is an overshoot or a trend that is expected further. And whatever the UK’s valuation pull, the non-financial uncertainties facing buyers are increasing. This may be a government that embraces free markets, but it inherits a new national security regime designed to subject many more transactions to automatic scrutiny.

UK competition authorities appear determined to establish themselves as a world leader in antitrust enforcement. Add to that the fact that their review process is lengthy and would-be buyers may wonder if a move is worth the risk. There is also the possibility that if Truss’s game fails, the government will change again. She doesn’t have five years ahead of her as a prime minister voted for by the electorate.

However, there will be situations where the stars align for bidders with strong balance sheets able to take advantage of all this – where a UK takeover target trades relatively cheaper than international peers, where antitrust and national security risks are worse for competitors and where it is possible to have some faith in the company’s long-term earnings prospects. Some Aveva stockholders are reportedly pushing back at Schneider’s bid, which landed when the target looked particularly vulnerable. Many more depressed shareholders in the UK market may have to find their backbone if other opportunists attack.

More from Bloomberg Opinion:

• Kwarteng’s mini-budget sets up damaging battle between Treasury and Bank of England: Mark Gilbert

Britain is going the wrong way on the energy rescue: Javier Blas

Is Kwasi Kwarteng ready to save Britain’s economy?: Adrian Wooldridge

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

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