Panmure Gordon’s chief economist Simon French has said reduced investment in UK stocks had created a self-reinforcing “doom loop” that left them significantly undervalued.
Cheap UK stock prices have triggered a spate of foreign buyers and private equity firms queuing up to buy companies listed on the London market.
Dozens of small British companies have been acquired at a significant premium in recent months, including Hotel Chocolat which was snapped up by confectionery giant Mars for £534m, a 170pc premium to its market capitalisation.
Such is the fear gripping the City over the issue, that top fund managers have been urging boardrooms to be wary of accepting lowball bids.
Edinburgh-based fund manager Aberforth Partners, one of the largest investors in small UK quoted companies, recently sent a letter to dozens of chairmen warning against accepting underpriced deals, according to City sources.
The influential funds group, which invests in nearly 80 listed companies including well-known names such as Foxtons, Card Factory and DSF Furniture, is said to be alarmed over the number of boardrooms agreeing to cheap deals.
Aberforth recently highlighted its M&A concerns in an update on its engagement activity, warning there was a risk UK companies could be sold at “levels far below their intrinsic value” due the low valuations.
The group last year voted against the £500m takeover of car dealer Lookers by foreign rival Alpha Auto, calling the bid “highly opportunistic” in a sign of its concerns. The deal was eventually completed despite Aberforth’s opposition.
Aberforth’s letter mirrors a similar dispatch it sent to boardrooms during the Covid warning companies against dividend cuts.
The group declined to comment.
The pace of recent takeovers combined with the lack of new floats means the FTSE All Shares Index could cease to exist by 2028, according to Peel Hunt.