2020 – New Year, New Decade, New Opportunities
The UK General Election was held in December 2019 and voters overwhelmingly gave Prime Minister, Boris Johnson, an 80 plus-seat parliamentary majority, one of the largest in Europe and the largest since 1983. The UK Conservative Party has won more elections than any other political party in the western world and has often touted its business-friendly credentials. It is the party of Margaret Thatcher and Winston Churchill and it now has an unfettered and arguably unprecedented mandate to drive growth, investment and innovation to new levels.
Given the size of the Johnson administration house majority we believe this will now give many investors confidence in both the UK and its legislative agenda, which should see the enaction of an aggressive package of manifesto pledges including a significant increase in government spending in 2020 and beyond. Ultimately much of this will trickle down into the private economy. It should also encourage a rise in private sector investment.
The long running and much hyped Brexit process, which has mired legislative progress over the past 3 years, will probably proceed with little further disruption and potentially far less publicity and drama than seen in recent months. From the end of January, a transition period will operate until the UK completes its comprehensive trade agreements with the EU. Given that the UK already has regulatory alignment with the EU we believe that much of this should be straightforward, although we still expect it to take several years to complete.
The UK will also be free to pursue agreements with Japan, China, India, Brazil and the USA as well as the many Commonwealth countries that continue to have strong and unique ties to the UK. Therefore, by the middle of the next decade the UK will likely be a little more like Switzerland and a little less like France.
While the UK has faced some headwinds, it continues to be one of the top performing economies in Europe and currently has the lowest unemployment rate in almost 45 years. HSBC Global Research forecasts that the UK will outperform the Eurozone and its key economies in 2020. The UK has represented 38% of the European Alternative Lender deals market since 2012. We believe that disciplined investors will continue to seek value by targeting growth businesses operating in attractive market sectors with downside protection.
Three things in which the UK is a world leader…
The UK has spent 40 years transforming itself into a ‘services’-based economy – it exports more services than any other country outside the USA. For example, the UK operates the world’s largest legal services industry outside the USA. Individuals and companies from all over the world use UK law and its judicial system for independent legal remedies and dispute resolution, underpinned by one of the strongest and most established rules of law in the world. This then often makes it a very attractive destination for both talent and capital.
The UK has the ability to attract talent, given that it operates some of the most prestigious schools and universities in the world and has research and development centres of excellence. It is the largest educator of foreign students outside the USA and currently hosts almost 100,000 Chinese students.
The UK also has the ability to attract capital – it operates Europe’s largest and most sophisticated financial services centre, namely London; it has also continued to attract some of the highest levels of international foreign direct investment and has the lowest corporate tax rates in the G10.
Beyond the immediate politics and noise…
However, the far greater issue facing the UK, EU and the wider world is Climate Change. Additional progressive Climate Change-related policies will increase pressure on businesses and individuals, resulting in many being ‘incentivised’ and ‘penalised’ to change their behaviour. In 2018 the UK Government announced its intention to be carbon neutral by 2030 and in December 2019 the EU announced similar policies.
It is also interesting to see larger investment groups such as Blackrock announcing in January 2020 that they intend to focus on ‘sustainable investing’ after criticism that the company has failed to use its clout to combat climate change. This is important for several reasons. Not only does the firm manage approximately USD 7 trillion*, but its asset allocation models are used by many institutional investors globally, representing approximately USD 25 trillion. This also demonstrates that the mainstream investment management industry is finally waking up to the fact that in this area at least, many of them have been behind the curve in terms of consensus opinion of many underlying environmentally-socially conscious clients.
Therefore, the government ‘money tree’ will probably focus on both the biggest polluters and the most strategically important sectors. Farming meets both these criteria as an important part of the food security umbrella and the second largest global polluter. UK farming, food and agri businesses will need to see substantial innovation in the near future, and private finance firms will almost certainly play a big role in this ecological and business revolution.
Finally, despite the UK’s 5.7 million SMEs employing more than 90%** of the work force they continue to struggle to obtain finance from traditional bank lenders, where approximately only one in ten currently gets funded and interest rates across Europe remain low.
In conclusion we believe that both our Agri/Renewable Finance and SME Finance credit funds are well positioned to take advantage of this environment and both our dedicated specialist Finance Arrangers are currently reporting record levels of deal flow pipeline opportunities.
We take this opportunity to thank our investors and stakeholders and we look forward to continuing the journey.
SOURCE: HSBC / UK Office for National Statistics / * BlackRock / **Gov.uk / Economist