London, Asharq Al-Awsat- In my last few articles I focused on Saudi Arabia and Abu Dhabi. This week I am looking closer to home again with the British government announcing its budget for 2012/13 today. I understand that encouraging business will be a feature in it. I would like to briefly consider three opportunities: manufacturing, Infrastructure and financial services. So is this a good time to look at investing in the manufacturing sector?
Manufacturing matters. It creates a fifth of Britain’s national output, employs four million people and produces the majority of our exports. There are opportunities as manufacturing is put into the spotlight. Britain has many advantages include a world-class science base. According to the British Government the best British manufacturers match the best in the world in new product development, innovative production processes, marketing and services – all the elements of the increasingly complex value chain of manufacturing.
It is not surprising that Britain is looking to expand its manufacturing base, but it should first be acknowledged that Britain has remained in the middle of the top 10 manufacturing nations for the past few decades. This is often misrepresented as the services sectors have grown very fast and so reduced manufacturing as a percentage of GDP. The plan is to improve productivity and competitiveness, to create better paid jobs for our manufacturing workers and higher returns for manufacturing investors.
There is activity again. The FTSE 100 Engineering company GKN is in advanced talks to take over Sweden’s biggest aerospace company. GKN appears to be close to a US$1.2 billion bid to take over Volvo’s aircraft business, which makes engines and components for the world’s largest aerospace manufacturers. If the goes through, it would represent one of the biggest acquisitions by a British manufacturing companies since the banking crisis. This is a very positive sign.
Before a national budget everything is conjecture, but here we go anyway. It looks like George Osborne, the chancellor, will aim to make Britain an even more attractive place to do business. It is anticipated that he will signal more cuts in corporation tax, possibly setting out a plan to bring it down to 20%, significantly below other large westerner economies. Sources say that the chancellor is determined to give priority to business. He has already cut corporation tax from 28% to 25% and will bring it down to 23% by 2015. This looks like a new target for later years. This compares with America’s basic rate of 25% and France with 33.3%. Although lower at 15% in Germany there are other social taxes that bring the effective tae to 30%. This is all part of the intention to keep Britain as an attractive place to invest in industry. Of course Britain is still one of the most welcoming of countries for international investment.
Another part of the business-friendly measures is likely to be details of infrastructure plans.
The British Government plans to create an environment which facilitates investment by pension funds and sovereign wealth funds in UK infrastructure. Whilst pension funds do, to a certain extent, invest in infrastructure already, the level of investment is low in comparison to some other countries. Part of the explanation lies in the knowledge‐gap facing pension funds following the demise of the monoline insurance industry. One way of addressing this is for projects to be appropriately rated. A sound investment grade rating from a credit rating agency might facilitate pension fund investment in a project.
To ensure such ratings are achieved, for large PPP projects at least, the Government might consider providing credit enhancement along similar lines to the current European Investment Bank and European Union proposals such as first‐loss protection.
Since pension funds are more likely to show an interest in investing in the less risky post-construction phase of a project and banks are increasingly likely to focus on short‐term lending, solutions to project funding problems have often focused on ways of combining short‐term bank lending during the construction phase with long‐term institutionally‐led funding for the operational phase. This, of course, raises the problem of re‐financing risk, so one useful intervention could therefore be for the Government to underwrite re‐financing post‐construction.
I attended a roundtable for City Institutions in December 2011 which indicated the need for a better dialogue between investors and developers. The overriding message from the event was that there was no shortage of equity ready to flow into the ‘right’ opportunities. Much of that equity would come from pension funds.
According to recent research by TheCiyUK, which champions the international competitiveness of the financial services industry, global pension assets enjoyed their third successive year of recovery in 2011 rising by 3% to $30.9 trillion. The increase follows an upturn of 10% in 2009 and 11% in 2010. The UK, with pension assets totalling $3 trillion remains the second largest market in the world accounting for 10% of total assets. UK assets are only exceeded by the US market where assets of $17.4 trillion make up more than half (58%) of the global total. I will come back to TheCityUK shortly.
Now back to TheCityUK as I promised. Companies across the UK are set to benefit from a new partnership between the Dubai International Financial Centre Authority (DIFC) and TheCityUK.
The DIFC has signed a Memorandum of Understanding (MOU) with TheCityUK to share financial, legal and regulatory expertise, collaborating on areas of mutual interest including closer links on education, training and qualifications. The agreement is expected to provide a significant boost to UK exports in the Middle East and North Africa region, where the United Arab Emirates already accounts for £3.9 billion of UK exports.
The MOU has been signed by Chris Cummings, Chief Executive of TheCityUK, and Abdulla Al Awar, Chief Executive of the DIFC. The MOU was signed in the presence of His Excellency Abdullah Mohammed Saleh, Governor of the Dubai International Centre and the Lord Mayor of the City of London.
So this might well be a good time to consider investing in Britain. Manufacturing can bring both returns and knowledge transfer; safe infrastructure investment is always attractive an financial services is broadening its objectives.
And talking about the finance, Greece took a critical step last Friday to avoid bankruptcy with an unprecedented debt write-off deal, allowing eurozone finance ministers to announce a second bailout was on track. The event means Greece is now set to repay debt due soon and has a second chance to rebuild its shattered economy, while the eurozone has dodged default chaos that could have destabilised global financial markets.
But it also led a key derivatives group to declare that Greece had witnessed a “credit event” that triggers payment of insurance policies known as credit default swaps to investors in Greek bonds. A committee of the International Swaps and Derivatives Association voted unanimously to declare the credit event after a large majority of Greece’s private creditors signed on to a debt swap aimed at erasing €107 billion euros ($140 billion) worth of Athens’ debt.
EU officials had previously welcomed with relief the largest debt swap ever undertaken. Is this the end of the problem? No, I regret. I have to agree with financial analysts who warned the Greek problem was simply contained, not buried.
Britain being part of the world’s largest single market as well as being one of the world’s most open trading nations is looking like a useful place to stay involved and invested.
John Davie is a visiting professor at London Metropolitan Business School and chairman of Altra Capital