Why Britain faces a blitz from foreign predators

To buy British equities is to buy into the entire world economy. Over half the earnings of the FTSE 100 companies come from overseas, where the most profitable boom since the early 1970s is still raging.

So the dismal showing of British stocks against US and even European shares over the last five years may not do them justice, rendering UK PLC ultra-cheap and ripe for the picking.

Graham Secker, an analyst at Morgan Stanley, said UK equities were now the best buy in 25 years.

"The spread between the current corporate bond yield of 5 per centand a return on equity of 18.5 per centhas never been higher than it is today," he said. Investors can borrow money and make a tidy double-digit profit investing it in stocks.

The return on equity is 14.7 per centin the rest of Europe and 16 per centin the US. With such a tempting spread, it was only a matter of time before foreign predators armed with cheap credit launched a takeover blitz of UK Plc.

Last week they circled Pilkington glass, P&O ferries, and the mobile operator O2 in the most fevered bout of mergers ever seen on the London Stock Exchange. There have been 161 foreign takeovers so far this year, together reaching £33 billion, an all-time high.

If outsiders stormed the German, French, or Italian markets with such gusto they would set off a furore as Banco Santander discovered in its failed bid this year for Italy's BNL. The British are just grumbling sotto voce.

Spain's Telefonica is hardly buying O2 at a discount for £18 billion, a 22 per centpremium. The synergies look scant, given that two firms operate across different countries.

But money is cheap as long as the European Central Bank holds interest rates at 2 per cent, below inflation, and gushing world liquidity allows Telefonica to pay for the entire bid in cash with a syndicated loan.

Nor are British takeover targets getting any cheaper. Firms are spending some £1.5 billion a month from bulging cash reserves to buy back their own stock, and balance sheets are the healthiest in years.

Morgan Stanley said there is now a wall of money ready to hit the market, but too few stocks as mergers shrink the tradeable pool. It said an extra £30 billion will be looking for a home in the UK markets over coming months.

Chris Iggo, from AXA Investment Managers, said there was enough credit in the world to fuel Britain's bull market for another 6-12 months. "After that the liquidity argument will drain away because we are going to see interest rates rising in Japan and Europe next year," he said.

But Iggo said Britain was a two-tier market. "The best performers have been in mining, oil and gas, and chemicals which are geared to the global economy, while general UK retailers have been the worst," he said.

For all the bullish exuberance, there is a counter-view emerging that UK Plc may be lagging for a good reason: because an avalanche of extra taxes and regulations under Labour is sapping the vitality of the economy.

In a report, the CBI contrasted the 24 per centrise in the FTSE 100 index since May 1997, with those of Milan (91 per cent), Toronto (84 per cent), Paris (74 per cent), New York (51 per cent), Frankfurt (47 per cent).

Analysts have been asking whether markets have been discounting a slow economic deterioration, albeit one with a very long lead-time. Britain is sliding down the OECD tax league, and has fallen from 4th to 13th place in the world competitiveness.

Most ominously, firms have cut investment to an all-time low as a share of GDP, hinting at a collective mutiny by Britain's wealth creators.