London Calling: Cheap stocks, AI upside and resilient consumers

After a week of company meetings in London, it appears that while macroeconomics shocks such as war and inflation, plus the added long-term risk of artificial intelligence (AI) have had an impact, UK companies have been relatively resilient and are performing well. 

This hopefully will provide a great read through for Australian undervalued growth companies as we move into the 2027 financial year and the August 2026 reporting period.

The macro backdrop is hardly perfect. The political environment is weak and the media narrative around the UK economy remains negative. However, on the ground, conditions appeared more resilient than the headlines imply. 

The UK consumer is still spending, and the companies we met were not pointing to war, freight or cost pressures as drivers of softer trading. 

InterContinental Hotels Group (LSE: IHG), for example, has seen little change in terms of demand and occupancy for hotel rooms outside of the Middle East which we hope resonates to one of our larger holdings in WAM Capital (ASX: WAM), Event Entertainment (ASX: EVT). 

Offshore trips are always a great reminder that good companies are resilient and if you take a long-term view, businesses can emerge from a tougher environment in a much stronger shape.

Similar to the Australian market, the most striking observation was valuation across the companies we saw in the UK. We saw many high-quality businesses trading on low valuation multiples, often with strong free cash flow yields, active buybacks and double-digit growth. 

Companies such as JD Sports (LSE: JD), Rightmove (LSE: RMV), Inchcape (LSE: INCH) and Auto Trader (LSE: AUTO) continue to demonstrate solid operating momentum yet remain priced well below comparable global peers. 

Echoing what we have seen in Australia over the last 12 months, we think that investors need to see stability in the macroeconomic environment and fears around AI subsiding before we see investor demand return. We think we are getting closer to this point.

The trip strengthened our conviction that AI will be a net positive, with benefits now becoming increasingly tangible. While there is no doubt some industries will be disrupted, we think those companies that lead their industry and have proprietary data will actually benefit over the longer term. 

Meetings with Rightmove and Auto Trader reinforced our views on REA Group (ASX: REA) and Carsales (ASX: CAR) plus other technology companies that have been hit hard over the last 12 months. 

Companies able to charge revenues based on the usage of AI products rather than on a per seat basis can become major beneficiaries and we remain positive on companies such as Fineos (ASX: FCL) and TechnologyOne (ASX: TNE). 

We also believe industries that are regulated like financial platforms like HUB (ASX: HUB) and Generational Development Group (ASX: GDG) will be protected, reinforced by our meeting with Relx (LSE: RLX).

AI is driving significant infrastructure demand, with data centre and data factory investment providing visibility for suppliers well into 2027. Europe also appears to be at a relatively early stage of this investment cycle compared to the United States. 

This bodes well for technology resellers in Australia sch as Data3 (ASX: DTL) and Dicker Data (ASX: DDR). Beyond AI, electric vehicle adoption remains strong across Europe as it does in Australia with no signs of slowing down. This should continue to benefit car dealer AP Eagers (ASX: APE) and novated leasing provider McMillan Shakespeare (ASX: MMS). 

Battery storage in Europe is a rapidly growing and increasingly important market with increased volatility experienced over the past 12 months boosting technology provider Energy One (ASX: EOL). Defence spending is accelerating meaningfully as NATO countries re-arm, with several European nations lifting expenditure. Ukraine drone manufacturers are moving into 

Europe to benefit from increased stocking of drone warfare with countries such as the United States and Taiwan ramping up expenditure. This tailwind will remain for Codan’s (ASX: CDA) subsidiary DTC who supplies unmanned systems.

​​​​Overall, our trip to the UK provided us further conviction on the Australian-based companies within our portfolios and reinforced an important investment lesson: poor sentiment can create attractive opportunities when company fundamentals remain strong.