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A halloween treat after tricky October

A wave of M&A activity brought the market back from the dead on October 31, says Matt Davis

Asurge of M&A activity on the last day of October came as a relief for UK equity investors reeling from a tough month.

O2 shares rose from 164p to 205p – a 25 per cent increase – after Spanish giant Telefonica’s 17.7bn bid was confirmed on Halloween.

Bates Investment Services senior investment adviser Paul Ilott says four funds have benefited from being overweight in the firm. They are Schroder UK alpha plus, Schroder recovery, Martin Currie UK growth and Invesco Perpetual income.

Schroder UK alpha plus has the biggest exposure to 02 by percentage, holding 5.6 per cent of its 430m in the firm, making it the fund’s biggest holding. It will therefore have grown by 6m as a result of the rising share price.

It also has a small holding in P&O, whose shares rose by 38 per cent from 303p to 413p on October 31 after it was approached by DP World, a Dubai-based ports operator.

Fund manager Richard Buxton says: “O2 and P&O demonstrate our long-term patience and often contrarian approach. It has not always been a smooth ride but we knew we had essentially good quality businesses and we could see what, in the long term, good management would be able to achieve.”

In the investment trust sector, the JP Morgan Fleming Mercantile trust has a 2.2 per cent holding in P&O while the Shires income trust has 4.7 per cent in the firm. The Isis UK select trust has a 3.4 per cent holding in 02 while the Jupiter global green trust has a 3.7 per cent holding.

Jupiter global green manager Charlie Thomas says: “Com- panies with specialist niche operations or complementary assets in local markets together with high free cashflows can look attractive to predators, fitting well within the strategy of large players.”

Companies look even more attractive when the predatory players are based overseas. Threadneedle head of equities Michael Taylor says earnings growth in the UK has been so strong that, in valuation terms, the FTSE 100 is around the same levels as it was in the depths of the bear market in 2003. Low valuations provide compelling buying opportunities for acquisitive overseas firms.

Taylor says: “Overseas companies are clearly reacting to the value in the UK market, even if domestic investors have not uniformly recognised what is happening. Six FTSE stocks have been bid for in 2005 compared with one in 2004 and none in the two years before that.”

So are domestic investors missing out? Dennehy Weller director Brian Dennehy says if UK investors continue to avoid getting into their own stockmarket, then the overseas competitors of companies such as P&O and 02 will beat them to it.

Dennehy says: “Fund sales in the UK are nothing like what they were in 2000. It is a bit like someone has died and a large part of the UK investing public is in mourning. In the meantime, overseas firms are seeing the value and getting into the market.”

Iimia fund manager Daniel Lockyer says October was still bad for UK markets, which were down by roughly 3 per cent over the month, despite the last day’s uptick. Having risen to 5,515 in early October, the FTSE 100 fell back to 5,100 through the month.

On October 31, however, the market closed up by 79 points in one day at 5,293. The move represents the biggest single day’s rise in the FTSE for over two years and it is the psychological impact of this at the end of a rough period that interests Lockyer.

He says: “Although October has been a bad month for markets generally, the last-minute move up will restore confidence. A lot of fear or bad news can depress the market and, after markets had been overextended for a while in September, many people were thinking the October corrections were signalling we would be treading water for the rest of the year. But this push of takeover activity in the large-cap sector suggests otherwise.”

Despite a year of strong performance for UK equities, a rough October may have knocked retail investors’ confidence. IFAs will be hoping that the latest headlines will bring value and growth to their clients’ attention again before they miss out on the market’s opportunities.

AITC communications director Annabel Brodie-Smith says: “Fund managers are predicting further take-over activity and they will be looking to take advan- tage of these opportunities. After a gloomy October, the Halloween market rally has boosted confidence within the City but many private investors remain reluctant to invest in equities.”

It seems, however, that those benefiting most from all this activity will be those brokering the deals. Ilott hopes they might decide to put some of their bonuses back into the market. He says: “Even if you do not own a fund that has holdings involved in M&A activity, there is always the potential for your equity funds to benefit from such a wave, because lawyers, corporate financiers, management consultants and PR firms will all have big bonuses to spend or invest in the UK market.”

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