A tale of two economies

How does one futureproof an asset or portfolio when our (macroeconomic) direction of travel is currently dominated by issues such as:

• High-interest rates and inflation
• An economy, struggling to cope with the triple blow of Brexit, COVID-19 and the fallout of the Ukraine war, is being managed by a government whose main priorities appear to be small boats and inflation (although it appears only the Bank of England has the tools to address this issue)
• Foreign economies, underpinned by well-articulated Industrial Strategies and investment pledges, will prove more attractive to national/international investors’ funding.

Of all the current trends, decarbonisation is proving to be a major global structural driver:

• The US recently announced a $500bn combination of new spending and tax breaks to boost the country’s clean energy sector and stimulate its industrial innovation capability.
• China’s long-standing focus on green technology (especially solar and battery technology) resulted in the country emerging as the biggest green investor in the world last year.
• France’s 10-year investment plan has set out a strategy to transition their automotive, aerospace, digital, green industry, biotech and healthcare sectors by 2030
• The German government’s “three pillar” industrial strategy comprises:
  
  
  • Encouragement of entrepreneurialism
  • Mobilising private capital to support game-changing technologies such as A1
  • Maintaining technological sovereignty.

In the face of this, what plans are there to create a competitive and successful national ‘growth economy’ in the UK – critical to the ‘futureproofing’ advice we give clients?

Well, until quite recently, our industrial strategy was enshrined in the Chancellor’s four ‘E’s: Enterprise, Education, Employment and Everywhere.

I must confess I do struggle to translate Mr Hunt’s ‘clear message’ into smart strategic client advice.

Knowing what governments’ long-term plans are, is as critical to organisations’ investment strategies and operational decision-making, as they are to the nation’s future. But there seems to be a paucity of national strategic planning emanating from Downing Street (an Investment Advisor’s opinion, not a political statement).

Harsh? Perhaps, but Rishi Sunak’s five pledges seem to be more of an election-winning plan, than a national macroeconomic strategy.

The Starmer & Reeves £28bn a year ‘Green Prosperity Plan’ interested me. It promised to drive the nation’s transition to Net Zero and outlined a direction of travel – which would allow us to ‘sandbox’* ideas and potential investment strategies.

However, within weeks of its launch, Ms Reeves announced that the £28bn a year green investment would not start the moment Labour got into power as first indicated, but “We will get to £28bn in the second half of the first term” - another false dawn?

Being a city-to-farm firm, our nation’s green strategies are as important to our client’s business as are the Government’s 2017 Life Sciences Industrial Strategy, or the 2014 launch of the British Business Bank, in terms of accelerating funding for innovative companies.

National strategies impact every corner of our firm, which is why national macroeconomic strategies are so important to me. For example:

• Renewables, which currently generate almost 45% of the nation’s electricity, are on track to generating 100% by 2035 – this impacts the advice we give our landowner and farmer clients.
• Safeguarding the assets of our infrastructure clients (responsible for ‘transporting’ generated power from fields and offshore to homes, businesses, and public spaces) is dependent on legislation and regulations emanating from Westminster and Whitehall
• Helping our media, professional services, industrial and entrepreneurial clients acquire, dispose and renegotiate their business space contracts is what we do, against a backdrop of transformational structural changes, precipitated by hybrid working and post-covid workplace protocols.

I have lived and worked through at least four recessions, and I’ve learned that economic activity is cyclical. Recessions had profound impacts on our economy, but we recover and rebuild the fundamentals. Consider those ‘pain’ points:

• The 80s: companies’ earnings declined by an average of 35%
• The 90s: inflation was around 15% and interest rates hit a 15% high
• The 2008 Financial Crisis: a US subprime mortgage crisis quickly spiralled into the most serious global economic crisis since the Great Depression
• The current crisis: the combination of Trussonomics, Brexit, Covid, Ukraine and the end of ‘free money’ has led to a base rate hike from around 0.25% at the end of 2021, to 5% last month.

I have seen businesses, sectors, and countries, often feted as great successes, become victims of financial crashes. Consider:

• Corporate bankruptcies which would have been unthinkable when the companies were in their ascendancy – think Enron, Delta Airlines and General Motors.

• The retail sector (in 2007 it grew faster than the UK economy) and its rapid decline is almost mirrored by the record bull-run of the Industrial & Logistics sector in 2021 and the frenetic pace of pandemic fuelled leasing activity in 2022.

  However, commentators predict that “… the theme for 2023 will be a flight to quality, rather than a gold rush for new space.”

• The rise and falls of national economies include:

  • In 1990, Japan was the leading industrial nation per capita but, by 2022, public debt (national and local government) was nearly 250% of the country’s GDP
  • Iceland, once dubbed ‘The Nordic Tiger’, tamed chronic inflation and was much feted for its free-market policies. But in 2008 the country’s major banking crisis resulted in a country once ranked as the fourth richest in the world, crashing to No 21 in 2010.

So, what have I learned?

Leveraged debt is a prime catalyst for distress. Impending loan maturities, for retail and institutional investors, will be painful in the short term and inevitably lead to financial fatalities.

Trying to forecast the future has obvious pitfalls. Should we follow Tata’s example of investing in an electric car battery factory in Somerset, or is the future hydrogen fuel cell technology or cyber security, or green technology?

Perhaps being a post-industrial economy, we should continue to focus on financial, digital and professional services rather than try to compete in the industrial arena (green or otherwise) against competitors with subsidized energy and lower operational costs.

Perhaps futureproofing is no more than protecting the long-term value of assets and limiting liabilities.

*Sandbox: a testing environment for new or untested ideas