UK domestic companies are currently uninvestable. It may sound ridiculous to anyone that has an investment horizon that spans beyond March of this year, but such is the antipathy towards short-term uncertainty, that it feels as though many investors believe it. 
Stock market participants tend to place undue emphasis on the value of events. Social media amplifies information like never before, distracting investors from the pervasive forces that are likely to drive the long-term successes and failures of individual companies.
Such events include political manoeuvres, such as Brexit, as well as corporate mergers and acquisitions. The latter is inherently linked to executive management confidence, hence it tends to be most abundant when stock market valuations are highest.
In the third quarter of 2018 the value of takeovers of UK companies by foreign acquirers was £3.5bn, amongst the lowest since 2014. The number of deals also saw a notable decline. These statistics come as no great surprise given UK plc is, after all, uninvestable. At least, until March it is.
Anyone looking to invest in companies beyond the end of this winter of discontent might be interested to think about the UK’s potential to continue to exploit its position of strength as a research and development hub. The UK is home to eight of the world’s top 100 universities, which is well ahead of any other country outside the US. No surprise that it attracts more foreign students than anywhere else except the US or China.
The UK remains an innovation leader, and London is one of the world’s major venture capital hubs. In 2018, three of Europe’s largest venture capital backed scale-up companies were from the UK. These may well be amongst the largest UK companies in the future. Fintech start-up Revolut achieved a $1.7bn valuation, whilst virtual reality developers Improbable agreed a major partnership with Google, whilst securing a $500m investment from Softbank. Along with Oxford Nanopore, the trio were amongst seven companies in Europe that raised money at valuations above $1bn.
So, whilst stock market investors have derided the UK as a basket case, it seems others with a longer horizon continue to see the opportunities to invest in great companies here.
Evidence shows, unsurprisingly, that stock market valuations are a significant determinant of returns in the long run. The dividend yield on offer from the UK stock market is at its highest level, relative to bond yields, since the second world war. If nothing else, this reinforces the malaise around UK companies at the moment.
This simply ignores the great companies we have here in the UK stock market. Technology company Just Eat, which facilitates takeaway orders via its app, is valued at a 30 per cent discount to global peers. Low cost gym operator Gym Group is valued at a 60 per cent discount to US peer Planet Fitness, despite higher forecast growth in sales and profits.
Legal & General has a very long record of successfully investing in long-term infrastructure projects, including funding railways in India and Russia in the first half of the nineteenth century. Regulatory changes mooted could allow pension funds to invest more freely in such long-term projects again, which we believe should be a boon for Legal & General. The company today offers life assurance and investment products, and therefore benefits from ageing demographics in the developed world. But its UK-centric asset base means that its shares have performed poorly over recent years. Its forecast dividend yield is 7.7 per cent, a record high if you exclude the financial crisis in 2008.
Investors that have been brave enough to swim against the current, investing when others are reluctant to do so, and when valuations are depressed, have proved to have made some of the most attractive returns.
It may just be that it requires events to reacquaint investors with the attractions of UK companies. Imagine a scenario where a Brexit deal is agreed in Parliament, or indeed a people’s vote through a second referendum determines that the UK remains in the EU. Either scenario would likely see sterling move higher, increasing the spending power and confidence of the UK consumer.
Perhaps these are fanciful fictions. But whatever the outcome, it is likely that the best companies in the UK will not remain overlooked forever.
Benji Dawes is co-manager of the Premier UK Growth fund. The views expressed above are his own and should not be taken as investment advice.