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BLOG: UK corporates confident pent-up demand ‘will come through’

Written by: Alexandra Jackson
Speaking to companies is the most reassuring thing investors can do, particularly in tricky times.

Staring at screens all day wondering which way to go can be a recipe for second guessing, over trading and short-term decisions. So, when in doubt, I go back to the process and back to my companies.

Broadly, I would characterise UK corporates as feeling cautiously optimistic about 2021, trying to balance further lockdowns with a surge in activity as the vaccine is rolled out, and grappling with the tangible changes from leaving the EU.

With many companies we’ve talked to, there’s a palpable sense of pride in how they weathered last year; protecting profits, protecting staff and communities, or actively helping to combat Covid.

Obviously, that’s great for morale and productivity, and we can already see an uptick in new business formation.

UK companies particularly are thrilled that the politicking of Brexit is over at least, and they can get to work looking at the detail and whatever the new requirements are, having avoided a “no deal” scenario.

The CEO of an industrial business summed it up by saying “if we can handle Covid, we can handle Brexit”.

Once you get down into the sectors though, there is quite a spectrum. The hospitality names, not that we own many but we do talk to them, are increasingly frustrated and absolutely desperate to start trading again, with some offering their own spaces and even fridges to the government to assist with vaccinations.

But they also talk about pent-up demand which they are confident will come through, thanks to the huge savings glut that many consumers have been able to build up during 2020.

On the other hand, home improvements names, building and construction, online retailers, video games companies, most other things tech, and industrials are sounding really quite bullish.

Patios, new kitchens and bathrooms have taken the place of holidays in big ticket spending and we have some significant exposure there.

Within industrials, companies tell us that inventory levels have been drawn down to historic low levels and that even a tiny increase in demand will have a big impact. This typically leads to a strongly positive earnings cycle. So, this is our biggest overweight.

The other thing to highlight is that management teams across most areas are talking about M&A again. Thanks to depressed valuations, the UK actually saw a 24% increase in M&A activity year-on-year, while other European markets were flat or down.

This is not just public companies but lots of private equity bids too. What was interesting was that bids were coming in before the Brexit deal, and even before the vaccine. Long-term money doesn’t wait.

And I don’t think it’s just going to be bombed out businesses being opportunistically snapped up – more recently we have started to see high quality companies being taken out, often by a global peer with a much higher rating.

That should be a nice driver in our mid-cap world, but even thinking about some of the FTSE 100 names that we own like Ocado, with a market cap of £17bn, that is still a tiny nibble, for example, for an Amazon which has added $700bn of market cap just last year.

The valuation opportunity suggests we will see more inbound bids for UK plc in 2021.

Alexandra Jackson is fund manager at Rathbone UK Opportunities fund

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