Simon French, chief economist at Panmure Gordon, said the decline in investment in UK shares had created a self-reinforcing “vicious cycle” that had led to UK shares being significantly undervalued.
Low British share prices have foreign investors and private equity firms lining up to buy companies listed on the London market.
Dozens of smaller British companies have been bought at steep premiums in recent months, including Hotel Chocolat, which was bought by confectionery giant Mars Inc. for £534 million, 170% of its market capitalization.
There is huge fear in the City over this issue, with top fund managers urging the board to be cautious about accepting low bids.
City sources say Edinburgh-based fund manager Aberforth Partners, one of the biggest investors in smaller listed British companies, recently wrote to dozens of chairmen warning them not to accept cheap deals.
The powerful fund group, which has investments in around 80 listed companies including well-known names such as Foxtons, Card Factory and DSF Furniture, is said to be wary of the number of directors agreeing to cheap deals.
Aberforth recently highlighted its concerns about M&A in an update on its engagement activity, warning that low valuations mean UK companies are at risk of being sold “well below their intrinsic value”.
The group last year voted against foreign rival Alpha Auto’s £500 million takeover of car dealership Lookers, saying the bid was “highly opportunistic” and raising concerns. The deal ultimately went ahead despite Aberforth’s opposition.
Aberforth’s letter is similar to a similar document the company sent to boards when it warned companies about cutting dividends during the coronavirus pandemic.
The group declined to comment.
Peel Hunt says the recent pace of buyouts and a lack of new listings could mean the FTSE All-Share index disappears by 2028.
