Is the UK now investible?

by Nick Watts

The title of this article contains both an assumption and a definition. Dealing with the latter first, the general rule is that people invest in things to make money and that is investors’ sole motivation. Different investors will have different risk appetites and maybe be motivated by a desire to protect themselves against losses (ie. inflation protection) but ultimately people invest to make money. Simple really – or at least you would have thought so.

However the previous UK Chancellor, aided and abetted by various self interested parties really struggled with this basic investment rule. Through his Edinburgh reforms or Mansion House speech, he appeared to be looking at investment in the UK through the wrong end of the telescope. He seemed to believe that investors would put money in the UK because they were being coerced or persuaded to do so and that you could reverse the long term decline in the UK domestic institutional investor base by criticising it and blaming the investor. No the only way to get people to consider investing in the UK is to create a situation where people think they will make money by doing so.

To be clear investing in the economy is not the same as investing in the stock market. 80% of the FTSE 100 earnings are derived from outside the UK and, as has been discussed on numerous occasions, the collapse in the domestic institutional investor base is unhelpful. That said during my investment management career (which ended some 30 years ago), the UK was traditionally the 3rd largest equity market in the world and accounted for well over 10% of the world index but is now down to less than 4%. This has happened for multiple reasons but it would be difficult to argue that dwindling investor enthusiasm and confidence has not played a part.

The assumption I have made in the title to this article is that for the last decade or so , the UK has not been investible. Why? Pitiful investment as a percentage of GDP, chronically poor productivity, the damage done to the country’s economy and international reputation by Brexit and the breakdown of political competence and governance. On the latter point imagine you are the CEO of a company and every time you attend a quarterly board meeting, there is a new chairman (who knows nothing about the business).

This is similar to the challenge facing business and other organisations when trying to do business with government ever since Brexit. Unprecedented churn of prime ministers and secretaries of state are not a money making formula for any country. I could add to the list of issues that have acted as disincentive to investment but it can possibly best be summed up by the often repeated mantra “nothing works in this country”. This isn’t an environment where serious investors want to put money and they certainly don’t have to if they believe it will not be profitable.

So is there a reasonable chance that things might improve? Let’s start with the easy stuff. The new government have got 3 things going for them from day one. Firstly there is a belief that they cannot be quite as incompetent or self serving as the last lot. A very low bar. Secondly they have got a free run for a while as there is no opposition. While this is bad long term , it does present some short term opportunities. Lastly the economic cycle is gradually shifting in their favour. The interest rate cycle is changing and while inflation isn’t beaten, it has come off its highs. There are even signs of life in the UK commercial property market. Certainly we at FCMAS are seeing increased M&A activity in recent months as decisions delayed during the political chaos of recent years are now being activated. The money is there when people regard the opportunities as attractive. If the PM just sticks with his ministerial team in the same jobs for a decent period rather than constantly changing them, the ensuing stability will be seen as a good starting point.

However the country is facing profound long term economic and social problems and it would be naive to suggest that the current government can wave a magic wand and fix them. Indeed I would go further and say that there is very little evidence that they will take the radical steps needed to turn things around. The strategy of keeping quiet while your enemy were making mistakes was faultless in terms of winning the election but that is very different from what Keir Starmer describes as delivery. It is very early days , but a timid approach which lacks honesty and transparency is not going to move the dial.

Wes Streeting is right when he says that if you spend 170 billion sterling on an institution and it isn’t working, the issue isn’t just about money. However is radical reform on this government’s agenda? If it is, it is well hidden. The last government backed away from tackling obesity with its huge economic cost. A simple win is to reverse the policy.

It is a no brainer that taxation has to rise. The fact that it is at a historically high level is irrelevant. When you have increasing demands for public services where this growth is outstripping tax revenues being delivered by the economy something has to give. Being honest that tax have to go up while the structural issues of the economy are addressed must be sensible, particularly when there is no opposition. There are way too many economically inactive people in the UK at present for a variety of reasons and only a Labour government can adopt a policy of “tough love” to address the welfare bill. The tax code is dysfunctional and in urgent need of radical reform. Maybe get Paul Johnson to lead a review to completely overhaul it? This would be an important move to stimulating the economy. All but a few idealogical numpties recognise that Brexit has been and continues to be a disaster so radical action to sort the relationship out with Europe is vital. The government needs to be honest about this and set out bold actions to reverse the position.

The new government has already done a few good things but also made some errors. Personally I thought spending some money on public sector pay was a good call at a time when there was no political opposition but was compromised by the train drivers settlement where all the signs are that the government has been played by the unions. Something for the media to jump on! But this is all short term noise and not going to do much in terms of long term economic progress.

To conclude, I believe that for the first time for more than a decade , there is the opportunity to make the UK investible again. I think the new government is taking a very different approach to business than that of Boris Johnson! However the problems in the economy are deep seated and need both brave, probably unpopular and radical solutions if they are going to be fixed. The same is true of our broken political system where vested interests always get in the way of positive change. At this early stage one can say that the jury is still out as to whether things will improve but that is more optimistic than I would have been a couple of years ago.