Vicky Pryce: The first theme is uncertainty. There's a lot of political uncertainty, and nowhere more than in the US, given the presidential elections in November. That is, and will continue, to affect the markets between now and then and certainly after too.
Geopolitics is also a theme because there are going to be issues about any tightening in sanctions and a likely intensification of trade wars irrespective of who is elected in the US.
"We are already seeing the move to carbon taxes imposed on borders,
with the EU taking a lead and others to surely follow."
Then there is concern that there could be an escalation of the wars in Ukraine and the Middle East. Supply chains are once again being interrupted. If one were looking to invest and considering the possible geographical location of where some of that investment might be, issues such as what the impact on trade flows might be of tougher US or other regions’ tariffs or sanctions or worsening conditions for transporting intermediary or finished goods then you are going to be considerably more cautious in your decision making.
Another aspect is the response to climate change. It's not just that it affects how production is done, but also in terms of decisions on onshoring, reshoring, and what the impact might be of new barriers and extra costs being imposed on goods coming in from countries where some of the regulations on climate change and the production process followed are not compliant with international standards of carbon emission reductions.
We are already seeing the move to carbon taxes imposed on borders, with the EU taking a lead and others to surely follow.
So, the investment environment is becoming more difficult to navigate. But there are exciting opportunities in the new technologies to deal with the major issues the world is grappling with, including Artificial Intelligence (AI), and also from the growth potential in the developing world and the opportunities afforded as a result.
Vicky: It's bound to be transformative, there is no doubt about that.
The question is what path it is going to take on its way there. For instance, we see the concerns about the tech sector right now and whether the investment needed to keep up with the rising demand and new innovations such as ChatGPT will still allow sufficient profits to be made for investors. And whether in the end we may end up with an AI bubble that bursts.
"As firms are becoming bigger and more dominant they are also
likely to come under increasing scrutiny from regulators."
There is therefore a concern around the transition to an AI-dominated world and what will happen when we get there. There hasn’t been a clear pathway outlined of what it will all mean in terms of jobs, employment and the structure of production. And how it might all affect the structure of the economy. It is unclear as to which firms will survive and thrive.
In the meantime, as firms at the forefront of these developments are becoming bigger and more dominant they are also likely to come under increasing scrutiny from regulators across the world worried about signs of oligopolistic or even monopolistic behaviour.
Vicky: Yes, we've seen from the data for July on UK growth, which came out in early September that showed it was stagnant for a second month in a row.
If you look at the last four months, April to July, there's only been one month of growth, and that's a real problem.
For investors and businesses here in the UK, they’ve seen the end of political uncertainty, in the sense that now there's been an election with a decisive outcome. But global uncertainty is still with us, and businesses are worried about where to put their money in the future. There is hesitancy at present in terms of willingness to invest - and also recruit, and here, the contents of the October 30 budget will be crucial.
We’ve seen services recovering, real wages rising for about a year now, and households’ real disposable incomes finally improving because inflation is coming down. However, people still don't know what's going to happen next, how fast interest rates may be coming down, and whether taxes will be going up and therefore both individuals and business are cautious about spending. A considerable part of what households saved during Covid still lies in bank accounts, at least now earning a little bit more interest than before.
The fact remains that as a result of previous policies, people are being taxed more heavily than they have been for several decades, and business taxes, including corporation tax, are higher now, affecting investment intentions, despite more generous investment allowances introduced by the previous Conservative government. This is worrying as without business investment you can't move into the faster growth lane the economy needs, which would then also ease some of the fiscal pressures currently facing the government. On the other side, there is an increasing call right now for government to increase its own investment in the economy as a percentage of GDP.
High interest rates have not helped. Many economists are now arguing that the monetary squeeze may in fact have been too severe, not only here but also in the US and the EU, which are both seeing slowdowns in their own economies.
"If you leave interest rates too high, and it lasts for some time, then
eventually it hits the economy, and that's where we are now."
In some ways of course, published data looks better than it did in the second half of the last year, given that the UK was in recession for the last six months of 2023. Household incomes are also boosted by a further rise in minimum wage, and while at the same time public sector settlements by the new Labour government have been generous. The two cuts of 2% each in National Insurance Contributions paid by workers earlier this year have helped consumers’ pockets.
But the underlying fundamentals for the moment remain weak and businesses are calling for the government to support policies in the budget that promote investment to ensure sustainable long-term return to faster growth and increased prosperity.
This is because if you leave interest rates too high, and it lasts for some time, then eventually it hits the economy, and that's where we are now.
Vicky: Until recently we have had the US growing faster than everyone else in the developed world, mainly because of the substantial stimulus packages it has been implementing, which have attracted extra investment from abroad and kept company valuations high. That's one of the reasons why there has been a lot of interest in doing IPOs in the US rather than here, which has created considerable concern and also led to some regulatory relaxation in the UK to counter this.
Apart from the incentives and subsidies offered in the US, growth in the country has been helped by the fact that it is self-sufficient in energy and has been better able to recover its economy post-Covid and post the energy market shock from the Russian invasion of Ukraine
But we have seen increasing stock market volatility recently mainly because of concerns about growth and the path of interest rates ahead, this time starting in the US and spreading globally.
The underlying weak fundamentals are becoming clearer as recent poor manufacturing performance in the US and even more vividly in Germany, which is traditionally the growth locomotive for Europe, have demonstrated. The positive aspect about this is that with inflation now near target in many parts of the world, interest rates are beginning to come down and that should be a relief for both businesses and households.
Vicky: Partly because the UK is trying to compete on IPOs globally, there have been some relaxations announced by the Financial Conduct Authority (FCA) effective from the end of July 2024, which include a simplified listing regime, a removal of the need for shareholder votes on significant or related party transactions, and a flexibility around enhanced voting rights. This brings it into greater alignment with international practice - but as the FCA also admits, it does add a bit more risk, but it will, as they put it, ‘better reflect the risk appetite the economy needs to achieve growth’.
"For the moment, there is still disagreement as to whether companies
that follow ESG principles perform better than others."
Elsewhere, however, there are tougher reporting requirements being introduced to avoid ‘greenwashing’ on ESG by investors. It is not just an issue of environmental reporting but very importantly also the S and the G in ESG. These requirements in the EU are now being tightened to cover the entire supply chain of a business with extra reporting duties attached. These are expected to soon be adopted more widely.
For the moment, there is still disagreement as to whether companies that follow ESG principles perform better than others
The interesting factor, however, is that when one looks at governance - at least for the S in ESG - one change that has been pushed both voluntarily, and in some countries through legislation, is to have more women on boards and in senior executive positions, which has been proven to work.
Again, however, causality is not proven - at least not yet. In other words, the question still remains: is the better performance due to the fact that women are included in appropriate numbers or are these companies performing better in general, and therefore, they can afford to take the risk and do other things, such as promoting women more than others, that make them ‘look good’ and therefore tick all the boxes for investors.
