Trends, trade talks and transitions

Big Ben chimed - virtually at least - on 31 January 2020 to mark the United Kingdom’s (UK) exit from the European Union. But negotiations about a future relationship are still ongoing, leading many investors to ponder whether offshore investing is still a good bet in 2020. Which regions and sectors look positive for the offshore investor? Which geopolitical risks should be taken into account? And are inflows expected back into Britain? 

With the chains of European Union (EU) membership now broken there is a somewhat rose tinted view that Britain will be able to venture out into the world and forge trade alliances with other nations; trade agreements which (if they previously existed) were based on the EU’s terms of engagement, rather than Britain’s. This, of course, brings new fears and new uncertainties, but also greater opportunities to pursue the UK’s own domestic agenda. 

From an investment standpoint this does make the current British economy quite an interesting proposition. 

As investors we are always on the lookout for potential opportunities. Consider the following: Would you be interested in a business that has been in the doldrums for three years, is under new management, is experiencing pent up demand from delays in investment, and where the business - and the currency in which it trades – appears to be trading at a discount to other markets? 

Let’s delve a little further into this investment case. 

The new and ambitious management team seems determined to turn around a once great business, and opportunities are beckoning to meet, to do business with new partners, and to follow new growth avenues on their own terms. There will undoubtedly be speed bumps along the way, but the probability is that you would consider this to be an attractive prospect. And, chances are, you’d give it a second glance. 

However, right now UK Plc - despite a much more benign political backdrop – does not appear to be all plain sailing. The coming year will see stiff negotiations with Europe, and the news flow around the success of these deliberations will make headlines throughout. It is hoped that by the end of 2020 a full trade agreement with the EU will have been negotiated, but if Britain deviates too far from existing arrangements then the UK will still be at risk of a no-deal exit. This means that, in the lead up to the official end to the transition period on 1 January 2021, the known unknowns remain firmly in place. 

Back in time with BrexitOpportunities to watch 

There will, undoubtedly, be some sectors that will be prime beneficiaries of the UK’s new world order. Infrastructure stands out in this regard. 

The new UK government has stated its intent to end fiscal austerity and, as such, we have already seen a ramp up in rhetoric around spending on infrastructure. At the time of writing, an agreement had just been made to proceed with HS2, the high speed railway project. While this may be a populist move by Prime Minister Boris Johnson, as a thank you to previously traditional Labour-voting supporters for trusting the Tories this one time, this is a £100 billion plus infrastructure project to link up London with a high-speed rail link to the north of Britain and key towns like Birmingham, Manchester, Crewe and Leeds. The aim is also to improve rail infrastructure to connect the former great northern industrial heartland of the UK – an area which has not benefited from the same levels of prosperity and employment opportunities as London - and the South East of the country. It is said that the project will connect some 30 million people across the UK. 

Spending plans on construction and hospitals, not to mention additional forms of public transport, are also set to receive grants. This in turn will provide a major boost to the consumer, through employment growth and spending. It also bodes well for manufacturing as businesses will be able to relocate to cheaper regions, making them more competitive. In time these businesses may also enjoy swifter access to their end markets, whether these are in the UK or (if all goes well) Europe. 

Perhaps these projects, given their sheer scale, will keep the plates spinning, so to speak, and distract from the cracks that may appear as the tough trade negotiations get underway. 

Corporate lustre? 

At this early stage, it is less well defined as to how the previously unassailable financial services sector will fare. Many banks have already begun relocating offices to Ireland and Europe. 

As international investors we do examine world markets through a lens, and while on the surface the UK now looks much more interesting to us, the size of the market relative to the world is small, at some 5% of the MSCI AC World Index. The UK, however, has high levels of corporate governance and shareholder rights, and most of the large listed UK companies have truly global exposure. Such world-class businesses, which are undoubtedly successful at home in Britain, may well be viewed as acquisition targets by fast-moving global giants based in the United States and Asia, especially as sterling fundamentally looks cheap relative to overseas currencies. 

Many global investors have been avoiding UK equities these past few years, due to the uncertain geopolitical backdrop. We now envisage that a capitalist government which is supportive of business growth will likely result in many global investors re-assessing their underweight positions, resulting in inflows of capital back to UK equities. 

Global, future-focused prospects

The UK, of course, will continue to operate in a global, connected world making trends such as the growing digitalisation of businesses, and the now rapid adoption of cloud-based services, of prime importance. At a time when traditional industries may not be growing faster due to a lack of demand, the growth in companies stripping out the costs of doing business – be it in manufacturing processes or through financial efficiencies - means that the inexorable rise of technology seems unstoppable, and profit margins have remained supported while supply chains are improved. 

Secular trends in automation through infrastructural software, or enterprises adopting cloud technology are also notable, be these technologies used for data storage, to create factory efficiencies where robots connect to robots via artificial intelligence to eliminate workflow holdups, or even in the elimination of hardware in telephony abound. Keeping an eye out for businesses that will benefit from the roll out of the next generation of telephony – namely 5G – also holds potential for the future-focused investor. 

Other areas of interest are increased regulatory factors driving end markets, such as vehicle safety and cleaner air initiatives, all of which bode well for the adoption of hybrid and electric vehicles. 

Emerging markets may well be key beneficiaries of these global secular trends as a lack of legacy infrastructure means that early adoption is very likely to be key, as the middle classes grow wealthier and demand the latest modern products for this increasingly modern world. 

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