The Government must gamble, by spending to encourage investment in UK, thus creating growth

3 April 2023, 06:55

By David Buik

@truemagic68

In the last month, the world at large has been preoccupied with the threat of banking contagion, triggered by the collapse of SVB and Credit Suisse, followed by neurotic mutterings about Deutsche Bank, put to bed by strong responses from the Federal Reserve, the Swiss National Bank, the Bank of England, and Chancellor Sholtz.

When it comes to the banking sector, post the 2008/9 crisis, the word contagion continues to permeate like a pungent odour. This weekend speculation on the brittleness of Turkey’s banking sector is doing the rounds.

This financial hysteria has recently taken its toll on business confidence across the spectrum, causing stock markets to oscillate like “corks in a bath!” In terms of financial markets, confidence plays the ‘matinee idols’ role in terms of impetus for investment.

This fundamental ingredient has largely been in limited supply, both in the US, Europe, and the UK. Investors’ attitude towards stock markets has been neurotic. They have had, from time to time, to be light on their feet and head for a ‘flight to quality’ – gold, conservative stocks, though in the case of the US, the tech sector, for which US investors still have insatiable appetites. The NASDAQ is up 17% so far this year.

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One of the best barometers of financial and business activity has been the number of Initial Public offerings. Even the US and HK – normally two very ebullient centres of activity – have seen very few IPOS in comparison to last year. Globally IPOS are down 70% this year with only $20 billion of deals being completed.

Business has been marginally brisker in Hong Kong, where activity is only down 46%. China, itself, is starting to allow millions of dollars to be raised in the U.S. stock markets for start-up listings. Last year 126 companies had IPOS on the London Stock Exchange – very few this year.

Aquis Stock Exchange hosted 22 last year and so far this year, three have come to market. One of the attractions of Aquis Stock Exchange is the ability for retail investors to have direct access to IPOS.

Here in Old Blighty, London is being seen to lose ground to New York as the leading financial centre. When conditions become more favourable for investing it appears that ARM Holdings, CRH Holdings and Flutter – all multi-billion Dollar IPOS, which will take their chance on the ‘Street of Dreams’ rather than raise their capital in the UK.

This is disappointing, but there are some mitigating circumstances. It is taken as read that New York has far great access to funds and investors than we do in the UK.

That probably means that any substantial tech-based ‘mogul’ will probably prefer to use the NASDAQ or NYSE for its IPO. However, that does not mean that London cannot be a very attractive place to raise capital, not only in the fintech, biotech and other technology-based operations but also in many other sectors, through their respective IPOS. There will be copious opportunities for companies to come to the market to raise capital. Hopefully, the UK’S FCA will lighten up regulation criteria to attract investors to these shores.

Though the UK’s economy has all but flatlined in the last year due to the understandably negative effect of hyper-inflation, the Ukraine conflict, and some negative impact from BREXIT, many believe that inadequate attention has been spent by the Government to attract investment into so many aspiring start-up operations, fintech, semi-conductor supply, car battery production and many other business opportunities.

The cry from the wilderness to rescind the new corporation tax increase from 19% to 26% fell on Jeremy Hunt’s deaf ears from this month’s Budget.

This sent the wrong message to international investors. In January PwC analysis of more than 4,400 top chief executives in 35 countries at Davos’s WEF, believed the UK had become the joint third most important country for investment. It was equal with Germany and behind only the US and China. Some encouraging tax concessions for SMES were addressed in the Budget.

However, it was perceived as insufficient encouragement for business. Everyone is cognisant for the need of fiscal discipline after the damage that was inflicted by the Truss/Kwarteng unaudited plans for the economy in September 2022.

Nonetheless, it is imperative for the Government to be bold in the next year. The Government must gamble by spending, to create growth. Let’s hope that Messrs, Sunak, Hunt, Shapps, Donelan and Badenoch understand what is required.

There are a few cumuli-nimbus clouds of concern hovering over the UK’S economic challenges, especially inflation, accompanied by the distinct possibility of higher interest rates in the US, EU, and the UK and of course the withdrawal of state support, with indecent haste, of energy costs for business. Any increase in bank rate above 4.5% could have a very damaging effect on growth and employment. The consumer and business will struggle to service debt.

Hopefully, inflation has peaked, but it may take longer to abate than many think. Included amongst those who might struggle could be hedge funds and private equity – often the bane of peoples’ ire - but fundamental ingredients for many a successful investment plan.

Ironically, The FTSE 100, being an international index and not reflective of the UK economy, was the best-performing global index last year. However, with the ‘250’, both have been significantly undervalued in comparison with their peers in the US, especially since BREXIT – many believe by as much as 30%! Hence so many predators have been prevalent in recent years. Given a fair wind and some inspired financial help from the government, CONFIDENCE in UK assets can be restored, as well as London’s continued prowess as a financial centre.

News of the UK joining the dynamic Trans-Pacific partnership, derisively belittle by many and erroneously so, will be seen as very positive.

The deal will cut tariffs on exports for UK industries including food, drink and cars and offer new advantages for business – all part of the confidence-building process!  

David Buik & Michael Wilson, two of the most respected commentators in the world of Money and Business come together for a weekly podcast – Money! As the markets become ever more unpredictable and peoples finances get stretched, they will detail the stories you need to be looking at – whether it’s mergers, acquisitions, or the effect of inflation on your wallet, the Money podcast will be covering the big business stories and how they affect you.