The Blog

Musings on corporate finance, fund raising, capital markets and other matters

Global equity markets, particularly in the US and Japan, suffered the worst January in years, with concerns over China and the collapse in oil to the forefront. Indeed, as oil reached a 12 year low last month, now is the time for UK business owners to start asking what impact global volatility may have on them.

The answer may depend on who you are. The pain for exporters and manufacturers is likely to intensify in 2016. Capital expenditure in the energy sector has already fallen sharply in the last 12 months. Some may investors have argued that the worst is over. However, even as directly affected industries, such as oil services show signs of recovery, less direct effects are still to be felt: the knock on impact of such a steep fall in demand in the energy sector is likely to be substantial, with suppliers further down the supply chain also likely to be hit. The repercussions may also be felt on businesses operating outside the commodity space, particularly those with exposure to emerging markets. The weakness in big commodity producers such as Brazil and Chile is likely to continue, while Russian sanctions will remain for the foreseeable future. The result of these headwinds are starting to show in the data with the latest UK manufacturing output figures showing a fall of 1.2% year-on-year (see picture).

UK manufacturing industrial production 2010-15

The pound may remain strong as prospects for a further dose of stimulus from the ECB rises, providing no relief for UK exporters. Furthermore, the longer the global economic turmoil remains, the less it seems likely the Fed embarks on a steady march of rate rises, signalled by the first rate rise for 9 years in December. An interesting parallel may be found in how the Asia crisis played out in 1997/1998, where a sharp drop in commodity prices and an emerging market slowdown, halted, and then reversed, a widely anticipated rise in dollar rates. That episode also showed the power of global feedback effects, where, what was initially considered regional illness, slowly deteriorated into a worldwide malady.

Businesses with a domestic focus, may have greater reasons for optimism. The fall in house price growth seems to have stabilised, while the cost of mortgages remains low - with 2 year fixed mortgages at below 2% for mortgages at 75% loan-to-value, a key factor for the MPC in calculating the impact of higher rates. Combined with the continued growth in real incomes, as well as the continued downward pressure on inflation, the drivers of UK consumer spending remain healthy. Indeed, UK consumer confidence remains near the 15 year highs it experienced last summer.

Finally, the explosion of alternative finance has greatly increased the range of financing options available to UK Plc. Many of the new lenders are looking to lend long term and build a relationship with the borrower, in much the same way a bank used to do. This new, more patient capital, allows many UK mid-market firms to lock-in current financing conditions, with money from providers who have the ability and appetite to look beyond the short term and focus on long term fundamentals.