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Post Brexit, where are the returns?




3 min read

We’ll be asking this very question at our event tonight. Yesterday there was a reminder of the immediate impact of the Brexit vote on the market. I’m not sure that it will have rocked any of your world, but it’s worth noting that Berkely Group, the house builder, fell out of the FTSE 100 and will be replaced by Russian gold and silver miner Polymetal. Housebuilders have been hammered by Brexit, and the FTSE 100 and safe havens like gold and silver have outperformed, so it’s not that surprising.

Brexit seems to hang over everything at the moment and linked to it is the great monetary policy experiment, which continues to stalk the markets. It appears that the Bank of England has done its bit for a while, but this week both the Fed and the Central Bank of Japan are making announcements following their meetings. The consensus appears to be that the Fed will hold off on any rate rise, partly because of patchy data and partly the potential destabilising effect of the uncertain US elections. So the driver might be the Bank of Japan, which is likely to defend its negative rate position. The BoJ’s meeting runs on Tuesday and Wednesday, with an announcement on Wednesday at close of market. With this Thursday and Friday being public holidays in Japan, leading investors are anticipating the news will be market sensitive.

QE and the low interest rate environment has meant that investors have been desperately searching for yield and return for some time now. Last week BAML published its fund managers’ survey for September. It stated that yields were so bleak that the respondents would rather hold cash. Meanwhile, 42 per cent of investors said they made moves into cash since the previous month, and 54 per cent of investors said they thought equities and bonds were now overvalued – an all-time high according to BAML’s survey. Investors believe that valuations are more overvalued than before the tech-bubble burst.

If you look at last year, AIM 100 companies outperformed the FTSE 100 and 250 significantly. Now investors are actually looking further down in the AIM market to search for returns. This has meant a drive in investment into previously unnoticed stocks, where investors see potential returns. At the time of writing, the AIM all share had been up more than 3% over the past month whereas the FTSE 250 was broadly flat. Does this mean professional investors are looking for true value or does it mean the ripples of monetary policy contagion are filtering through the market via asset allocation?  

For a fund manager investing in IPOs, it might be the perfect storm. There are a lot of ‘headwinds’ for IPOs – volatility, uncertainty around Brexit, global growth, the economy etc. These are a great stick to hit companies with when negotiating on price, especially when fund managers have cash lying around. Fund managers know that if you get the negotiations right, you will get relative value by way of a discount when the company’s shares list. The shares should re-rate almost automatically as those not allocated in the IPO try and participate in the discount early.  

Let’s test my theory. Hollywood Bowl, the UK’s biggest operator of ten-pin bowling alleys, announced the price of its IPO at 160p per share last week, giving the company a market capitalisation of £240m. It is being admitted to trading on Wednesday – let’s see what it’s like after day one! As keen ten-pin bowlers (as are most of our members), I’m sure you got in at the same price. Don’t worry, there was no retail tranche! Unbelievable.


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