Trends Watch: U.K. Equity Turnarounds

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with David Herrmann, Managing Partner, AozoraStep Capital.  

What is your outlook for investing in U.K. equity turnarounds? 

In the latest quarter, the U.K. economy grew 0%, whilst net migration increased the population by over 1%. The need for growth is urgent and the government is focused on delivering this. Most companies announced layoffs at the beginning of this year ahead of tax changes that come into force in April. Therefore, the worst might be behind the U.K. by next month and attractive valuations could deliver strong returns in the quarter ahead. 

Where do you see the greatest opportunities and why?  

Governments around the world face fiscal constraints and elevated inflation. The only way to stimulate growth at this point is through deregulation. The delta of this deregulation drive is the highest in the U.K. Banks and insurance companies are therefore best positioned to benefit from the combination of these factors. The U.K. also has a trade deficit with the U.S., which will be helpful in the new world of tariffs for certain manufacturers based in the U.K. 

What are the greatest challenges you face and why? 

With 25% of U.K. government debt linked to inflation, the U.K. struggles more than other countries when inflation spikes. Over the last 12 months, 38% of the government interest expense was down to inflation-linked debt. At the same time, the U.K. sticks to its very ambitious net zero goals. Net zero energy means replacing existing energy with more expensive renewables, which will keep inflation elevated, while not really creating growth. With European gas storage tanks potentially being 20% lower than last year, a renewed spike in natural gas prices over the summer could force the government to rein in spending or hike taxes again. 

What keeps you up at night? 

Whenever the U.S. yield curve comes out of inversion, there is usually a crisis (apart from 1999 when the market topped out a year later). We have had the longest yield curve inversion on record over the last two years. At the same time, there are many historic analogies to the 1920s, and with the U.S. focusing on tariffs to bring in additional revenues for the government, this could bring about deglobalization. In 1929, global trade made up 11% of global GDP. By 1935, global trade plummeted to 5% of global GDP. Today, global trade makes up 25% of global GDP. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.