25 April 2019
Europe Loves the UK
Money runs counter to political rhetoric.
by Frank O’Nomics
Are those that talk down the UK economy just looking to buy at a cheaper price? For all the gloom and despondency surrounding the intractable Brexit negotiations, the UK has not only remained a major target for overseas businesses and investors – it has actually become even more so. For the first time in since the financial crisis the UK is ranked as the most attractive place for investment and mergers and acquisitions, according to the EY Global Capital Confidence Barometer, which polled 2,900 senior executives responsible for making acquisitions. It seems that those prepared to take the long view have no qualms in continuing to target investment in the UK as being consistent with their bigger picture strategic investment plans. When one looks deeper into investment flows, it is clear that, while European politicians may be cautioning the UK over the path it is in danger of taking, European investors are still happy to commit ever-larger sums in our direction.
A survey of the confidence of business executives in itself might not be that compelling – it could just reflect wishful thinking or a willingness to say what an audience wants to hear. However, when one looks at the data the case becomes stronger. In 2018 the UK accounted for 10% of global M&A totaling over $400bn (its second best year since the financial crisis), putting it in first place having been as low as 7th after the Brexit vote in 2016. When it comes to investment, particularly from Europe, the flows are similarly impressive. Over the last 3 years European investors have more than doubled their investments into the UK. Over the past year, according to S&P Capital IQ data EU investors have bought 553 UK assets, totaling $31.1bn, through M&A and private placements, compared with $21.2bn in the previous year and $13.6bn in the year of the Brexit vote. International money managers have supported the flows, with the top 10 investors all having increased their holding of UK securities over the past 3 years. Those outside of the EU are also taking a positive line, with the Norwegian Sovereign Wealth Fund, whose assets total almost $1trn, recently announcing that it will increase its investments in the UK.
To some extent investment flows into the UK have been opportunistic. The fall in the value of sterling occasioned by the protracted Brexit negotiations has made UK assets look at least comparatively cheap. This relative value has been accentuated by the long-term bull run of international stock markets – valuations in markets such as the US look way more demanding than those in the UK. Further, for many the currency risks of investing in the UK have become somewhat asymmetric – the downside on a no deal Brexit seems to be less than the upside of an orderly withdrawal or no Brexit. The renewed slowdown in the European economy suggests that the interest rate differential to the UK will be at least maintained, which could be a supportive factor for sterling. Despite concerns over the political situation, there is still a widespread view that the UK economic environment is very conducive over the long-term, and this, combined with an attractive entry opportunity, has proved just too compelling for key investors.
If the long-term strategic arguments have been undimmed, what about the shorter term situation? This too would appear to have been overplayed to the downside – at least in comparison to Europe. The Eurozone Manufacturing Purchasing Managers Index has spent the last 2 months languishing at levels not seen since 2013. A reading above 50 points to growth, and one below 50 to contraction – the current level for the Eurozone is 47.8, indicating an economy close to stagnation. The UK manufacturing PMI on the other hand has remained resolutely above the critical level of 50, with the last reading at 55.1, up from 52.1. One might argue that this is partly the result of pre-Brexit stockpiling and also that the services sector is a much better indicator of our economic situation. A comparison of the services PMIs does suggest that Brexit uncertainty is having an impact in the UK, with a current reading of 48.9 (down from 51.3), while the Eurozone service PMI is above 50 (at 52.5), although this is lower than the previous month. The point is, for every worrying piece of data from the UK, there is evidence in Europe that is at least as bad, and the likes of Germany and Italy, 2 of the largest economies, look close to recession. German factory orders have been actually falling for the last few months, with its overall manufacturing sector contracting at its fastest rate in six and a half years.
What is clear from the recent survey evidence and analysis of investment flows is that key executives retain an international outlook in their search for growth and that, in the long-run, they continue to regard investing in the UK as being consistent with that search. Much has been made of the rally in UK assets since December, but measures such as the FTSE 100 are still some 5% below the highs seen last May. If investment was attractive on long-term grounds then, there seems little to suggest that it doesn’t continue to be attractive now, particularly when compared with Europe.
