The Amazing Vanishing Stock Market

Is the UK market picking up its ball and going home? Peel Hunt believes so and there's a compelling reason behind this, which it has dubbed the 'Amazing Vanishing Stock Market'. Peel Hunt warns of an ongoing trend of de-equitisation, fuelled by low market valuations, which shows no signs of slowing down without prompt action.

In recent years, the UK stock market has undergone a significant transformation. Low valuations have made it an attractive hunting ground for acquisitions, resulting in fewer Initial Public Offerings and a surge in takeover activities, particularly among smaller companies. In 2023 alone, there were 40 deals worth more than ￡100 million announced, indicating a notable increase in merger and acquisition activities compared to previous years and only a handful of IPOs.

The technology and leisure sectors have emerged as focal points for acquisitions, with overseas buyers seeking bargains in the UK stock market. However, beneath the surface lies a troubling trend – various sectors are being hollowed out, leading to reduced interest and expertise from investors. The average bid premium of 50% in 2023 highlights the undervaluation affecting many UK smaller companies, exacerbated by continuous outflows from UK funds.

Peel Hunt's Charles Hall stresses the urgent need for corrective actions to reverse this downward trend. Increased fund flow could be a game-changer, driven by stronger retail investor interest spurred by policy changes or incentives. Furthermore, addressing deep-rooted issues surrounding IPOs and equity capital markets is crucial for sustained economic growth.

But does this truly matter? After all, it primarily affects small and medium-sized companies. The short answer is “yes”. There is a tangible impact on economic growth; these SMEs grow rapidly and contribute significantly to tax revenue and job creation.

However, amidst the prevailing gloom, signs of resilience emerge. The market's low valuations alongside increased takeover activities hint at untapped potential waiting to be unlocked. The prospect of dividends, buybacks, and takeovers presents an attractive opportunity for long-term investors, signalling potential amidst the turbulent landscape of UK stocks.

As the UK equity market grapples with the spectre of de-equitisation, stakeholders are urged to navigate the evolving landscape with vigilance. Whether through policy reforms, shifts in investor sentiment, or changes in market dynamics, the journey ahead presents both challenges and opportunities in equal measure.

Is now the time for value investors to start looking very seriously at the UK markets?