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Alice Rigby
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Updated 21 Apr 2023
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

The headlines this week hailing the deal volume flowing through UK markets brought some light relief during a generally torrid period for investors. On Monday, companies with a market value totalling £4bn were subject to takeover bids, suggesting that a long-expected cycle of M&A activity is getting underway.

This is good news for some key investment trust sectors. Listed private equity trusts have been tentatively predicting a renewed spike in M&A activity and an appetite among buyers to find new opportunities could see some realization for trusts that have exercised their own investment cases. At the same time, suppressed valuations mean that new opportunities should emerge for these trusts themselves.

Another sector that has seen a surge in activity – to the benefit of the trusts operating within it – is biotechnology. The managers of International Biotechnology (IBT) in particular have talked about the role of M&A in the sector over the last year or so and rotated broadly into mid-caps, in part in anticipation of this trend continuing.

While inflation remains stubbornly high, and likely to extend the rate cycle further, the value of FTSE 100 and 250 stocks is surging, attributable in no small part to the surge in deals. In turn, this flow of deals reflects an economic outlook that is, actually improving, in part due to the settlement of the Brexit-related Northern Ireland trade treaty and the settling down of the political context (at least for now).

However, the picture is not entirely rosy for UK equity investors. While companies are being taken out of the market, UK IPO activity remains limited, with the decision by Arm to list overseas certainly not encouraging its peers to stay on these shores when they too go public.

Both the UK Government, in the form of several proposals in the spring budget, and the FCA, in the form of an announcement regarding listing rules last summer, are trying to make the listing environment more attractive for domestic companies and overseas players. However, it will take some time for these proposals to be put in place and to take effect within the market, and in the meantime analysts say that many private companies in the UK, such as the plethora of fintechs that sprung up during the pandemic, are choosing to merge instead.

In aggregate then, the UK equity market is currently shrinking. Fundamentally, the UK remains an interesting market and a leader in some areas. However, its changing fortunes and uncertain outlook re-emphasize the benefits of considering maintaining a diverse geographical allocation within a portfolio.

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