The UK’s SME and Investments sector offers investors a spectrum of options that span from traditional financial markets to cutting-edge technologies. With London as the world’s heart of global finance, this sector adds tremendous value to the nation’s economy.
However, beyond the capital, regional innovation hubs are changing the game for savvy investors. Constantly changing regulations post Brexit, increasing interest rates and the current cost of living crisis have a direct impact on how investments come through operates. What’s the latest in this sector, and how can investors make smart, informed decisions to stay ahead in the game? Let’s find out.
Jamie Dimon, the JP Morgan chief, has cautioned that the world may currently face its most perilous economic period in decades. The Ukraine conflict and the Israel-Hamas dispute are predicted to exert far-reaching influences on commodity markets, trade, and geopolitics, directly impacting investments in the western world.
The UK has already witnessed a surge in insolvencies this year, potentially exceeding the levels seen after the 2008 financial crisis. The number of insolvencies in England and Wales rose by 17% last month compared to the previous year. Insolvencies during the third quarter might slightly decrease from the 14-year high in the second quarter. According to non-seasonally adjusted data, the Insolvency Service reported 1,967 companies registering as insolvent, up from 1,688 the prior year.
Over the three months ending in September, 6,011 companies were declared insolvent on a non-seasonally adjusted basis – the highest since 2009. The rising interest rates and soaring costs of energy, food, and other necessities have placed significant strain on both businesses and households. The Insolvency Service attributed the surge in insolvencies to creditors’ voluntary liquidations, where business directors and creditors mutually opt to dissolve the company. Court-ordered insolvencies, making up a small fraction of the total. They have now returned to 2019 levels, following a decrease during the COVID-19 pandemic when legal barriers obstructed the forced liquidation of companies.
Funding Challenges for SMEs
New research by Bibby Financial Services has revealed a challenging landscape for UK SMEs seeking investments and funding. Although 43% of them report an increased need for external finance in the past six months, 54% find it more difficult to access financing. The situation has been made more severe as most banks are less willing to lend to SMEs with a turnover between £1m and £5m (71%).
Of those using external finance sources, incumbent lenders have also reduced funding between March and September. Amid rising inflation, energy costs, and high interest rates, SMEs are advocating for greater support, with 65% seeking enhanced tax incentives and 57% requesting improved access to loans and grants from the government.
Investor sentiment toward SMEs has remained muted this year. While most small enterprises in the UK are viewed as more exposed to the domestic economy, many of them have international earnings. Smaller companies tend to underperform during volatile periods and risk-averse market conditions. They can also be vulnerable if they rely heavily on a single product area or niche market.
This also means that there has been a sharp decrease in success rates for credit applications among SMEs, dropping from 74% pre-COVID to 46% in Q2. Despite these challenges, 63% of SME owners expect sales growth in the coming months. Of the SMEs needing external finance, 38% require it for daily operations, and 49% for expansion efforts.
There is a strong need for alternative financing solutions to support SMEs in these trying times. This is where investors looking to diversify their portfolios can come in. By exploring this and investing in SMEs looking for capital, these investors not only stand to potentially reap financial rewards but also contribute to the growth and resilience of the SME sector in challenging times. This presents an opportunity to align their investment goals with the broader aim of supporting the economic recovery and stability of SMEs in the UK
UK’s Project Infrastructure Challenges
One of the world’s largest infrastructure investors, Australia-based IFM Investors, has expressed reluctance to further invest in the UK due to political instability and uncertainty regarding government policy. IFM holds a significant portfolio of UK assets, including Manchester airport and the M6 toll road. But the prevailing climate of government dysfunction and inefficient planning processes has dampened its enthusiasm for infrastructure investments.
Luba Nikulina, IFM’s Chief Strategy Officer, explained that while they would like to invest more, the current landscape lacks financially appealing opportunities. The UK’s political uncertainty, marked by four prime ministers in four years, has heightened concerns. This development coincides with Prime Minister Rishi Sunak’s controversial decision to cancel the northern leg of the HS2 rail project, a move criticised by some former prime ministers, including David Cameron. The cancellation raises concerns about the UK’s ability to build consensus for long-term projects.
IFM Investors, which manages around $140 billion in assets, has stated that post Brexit regulations in the UK have failed to attract private investments. Additionally, the frequent turnover in government departments leads to uncertain policymaking, which makes it challenging for investors to engage in long-duration, capital-intensive infrastructure projects. The recent postponement of the ban on the sale of new petrol and diesel cars from 2030 to 2035 and the windfall tax on energy companies further compound the challenges.
Investors must be adaptable and resilient, ready to adjust their strategies in response to changing political and policy dynamics. It’s essential to stay informed about developments and be prepared to pivot when necessary.