Well, we said it could be a pivotal month! I confess that I didn’t have this exact scenario in mind, but it does seem to follow recent global trends of polarised politics and electorates looking for something new. This is still – as they say in 24 hour news circles – a ‘fluid situation’. But, today I just wanted to take a moment to think about where we could go from here. Emphasis on the ‘could’ since this could be an interesting ride.
The morning after
Let’s take a step back for a moment and think about the tremendous speed of the news cycle and how much we have to absorb on a daily basis. Yesterday, wasn’t the norm, even these days – hence the moniker ‘Triple Threat Thursday’. But, it didn’t seem that radical to have three major, potentially pivotal events happening on the same day. In the same way, today feels extraordinary, but in an ordinary way given that we’ve written blogs on the surprise victory of Donald Trump and Brexit in the last year alone.
Not that I want to play down this result. The UK political map has been redrawn to reflect the big themes we’ve been pointing to across the globe, most notably polarisation and the search for new ideas as Western electorates really start to feel the impact of slow growth on living standards. In just seven years, we’ve moved from an election that was all about the centre of UK politics –to wit, “I agree with Nick” – to a point where there are now distinct differences in the policies of the major parties. And the polarisation in ideas is evident between young and old, north and south, and city, town and country. So, it will be tough to build a consensus; but consensus we need, along with new ideas to meet new growth challenges. The outcome of the vote suggests that the electorate are looking for something new and there is a big debate to be had around public services and the size and the function of the state – as well as Brexit
When uncertainties have uncertainties
Of course, all this has implications for business, although we can’t say with certainty what those are beyond the impact of immediate uncertainty! Right now it looks like the UK will have a government formed by the Conservatives with the support of the DUP, but policies are still to be ironed out. There is still also talk of another election. The Brexit timetable looks even more challenging now, with varying theories about whether this will create the environment for a “softer” approach or for more entrenched interests to take the opportunity to push their case. If deals have to be done upfront to form a government, this may actually help to solidify the UK’s Brexit starting position quicker than expected – although this may not be where we end up. There are still 27 other parties to the deal.
I hope again that everyone works on the basis of building consensus (the word of the day). But for now, we wait.
Shaken, not stirred
This looks different to 2010, when we saw a coalition with a bigger majority. Back then, markets dipped, but settled pretty quickly. That said, today, despite the greater potential for uncertainty, we’re not seeing markets move all that dramatically. To my first point about the news cycle, abnormal is the new normal. Secondly, markets don’t like uncertainty, but they also don’t like radical policy change either. Hopes of greater consensus building on Brexit seems to be providing support for the pound at least. Sterling fell almost 2% lower, but is just about where it was before the election was called. The drop in sterling is pushing up the internationally-oriented FTSE 100. Across the board, there is still all that QE liquidity that we keep referring back to, because it’s just so vast.
So nothing to see here? Not quite. These are early days. We don’t know what policy deals will be necessary. There is a difference between steady as she goes, a policy vacuum and total impasse – and we’re not sure which one we’re going to get. If the internationally-oriented FTSE 100 is up, that reflects a fall in sterling plus an improvement in global markets after a sanguine reaction to the rest of yesterdays news. The more domestically-orientated FTSE mid-250 is down, with a focus on house builders (one of the most UK oriented sectors) and banks. There will be volatility until the dust settles and we can’t say how long that will take. There is a higher level of uncertainty now than prior to the election. We cannot escape that.
A deal pause?
So where do we think this leaves companies in terms of deals and capital raising? It’s a mixed picture, driven by this uncertainty but also other imperatives.
Earlier this week, we highlighted official figures showing a significant fall in the total value of successful domestic and cross-border M&A in Q1 2017. This came after an unusually high value of inward M&A in 2016, dominated by a handful of very-high-value transactions. Volume wise, levels were similar. But, given this new level of uncertainty, we could see a pause in domestic, but especially inbound UK M&A activity – or at least see pipelines filling less quickly as companies and investors pause to take stock. The pause may only be temporary, because – as we’ve said many times before – there are imperatives for companies to do deals beyond the economic cycle…and indeed, in some cases, because of it. Companies still need to build their digital capabilities and react to disruption and low growth. We’re effectively seeing M&A being used instead of traditional CAPEX and R&D. In response, what we could see – as we’ve also noticed recently – is even more companies looking at joint-ventures and alliances to spread risk and help capital go further.
There are two additional risks now moderating this outlook. The first is that capital could dry up. This doesn’t look like an immediate risk, but could be if uncertainties grow. Ultimately, lenders still need to put ample liquidity to work and QE has left a lot of capital chasing limited options. Perhaps more pertinent is the changing political attitude to deals and globalisation in general. Where there was consensus across party lines was in the need to apply greater scrutiny to deals and their social impact. This remains an area to watch.
Where we could also see a continued pause is in UK IPO volumes, which have already been effected by the weak pound and existing uncertainties. There is a risk that market nerves could increase and that investors could decide to move their money to other locations, such as the Eurozone where growth has picked up and political risk has fallen. This would hurt Main Market listings more than AIM, where there is a different investor focus. Companies could also further delay IPO plans and review alternative options meaning that we’ll still see deals take place, but not to the levels we have seen before.
Does it matter?
This is a question we asked way back in May. Our answer then stands now:
Yes, but it’s a crowded ‘concern’ market place
If we do effectively get the same government but with a smaller majority – as seems likely today, it’s a diversion along a bumpier track, rather than a complete route change. Undoubtedly, these are more difficult moments, but companies and investors can’t take their eye off what’s happening elsewhere and the bigger digital and geopolitical picture.
And I doubt that we’ve seen the last surprise of 2017.