Is the FTSE 100 ripe for takeover?

Should you buy FTSE 100 (INDEXFTSE:UKX) companies for their bid potential?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Following the recent £24bn bid for ARM Holdings, many investors may be wondering whether a flurry of bid activity is around the corner for the FTSE 100 (INDEXFTSE: UKX). After all, sterling has weakened by around 10% since the EU referendum and as a result, UK-listed companies are suddenly cheaper to buy for foreign investors.

Clearly, the valuation appeal of the FTSE 100 has improved since the EU referendum, although the index’s price level has increased by 6% during the same time period. Therefore, there’s limited additional appeal following the EU referendum in terms of the price of FTSE 100 companies. Of course, with the index yielding over 3.5%, it remains historically appealing from a value perspective.

Looking ahead, there’s scope for a further weakening in sterling in the coming months and this could increase the appeal of the FTSE 100 for foreign investors. This seems likely for two reasons. Firstly, the Bank of England has stated repeatedly that there are significant risks facing the UK economy. Therefore, a further reduction in interest rates is very much on the cards as policymakers attempt to boost the UK economy.

Secondly, the risks surrounding Brexit remain high and this could cause fear among investors to increase. Theresa May has indicated that she won’t invoke Article 50 of the Lisbon treaty in the near future, which means that the UK is unlikely to leave the EU before 2019 at the very earliest. This will undoubtedly cause the increased fear and uncertainty among investors to rise further, which may lead to another fall in the value of sterling.

High value

Of course, even if sterling falls, the rising value of the FTSE 100 could offset this. For companies reporting in sterling, a weaker currency will lead to a positive translation boost to earnings and as has been the case since the referendum, the price level of the index may therefore rise. And with uncertainty regarding the short, medium and long-term performance of the UK economy being high, some foreign investors may adopt a ‘wait and see’ attitude in the coming months and years.

However, even if the UK economy’s performance deteriorates in future, the reality is that most FTSE 100 earnings are derived from abroad. Therefore, it’s very much a global index and both domestic and foreign investors may be more interested in the progress being made by the US and China, rather than how the UK’s macroeconomic outlook appears.

And with the benefits of a weak currency potentially being offset by higher valuations as positive currency translations have an effect, the potential for increased M&A activity in the FTSE 100 may be limited in a post-Brexit world. In fact, little may change, with deals such as ARM’s £24bn bid continuing to be the exception, rather than the rule.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »