Mr Luke Morris
Scrutton Bland, UK
The UK is at a national crossroads. In one sense things are clear: one group of people want out of the EU by 31 October, while the other lot want to stay in.
Where it gets complicated is when this is shoehorned into the political set up. UK politics is a two-party system, but not one neatly divided along Brexit lines. Boris Johnson, the Prime Minister, and Jeremy Corbyn, the Leader of the Opposition, have far more complex incentives and constituencies and, in reality, are hungry for power.
The EU referendum has presented them both with an unprecedented and confused mess of political skulduggery and opportunity that is pushing the UK’s unwritten parliamentary conventions and historic bonds of loyalty to their absolute limits.
For example: Boris Johnson recently said he does not want a general election, but nevertheless tabled a motion for a general election. Jeremy Corbyn says he does want a general election but so far hasn’t supported the motion for a general election.
Confused? You are not alone. It’s impossible to predict what will happen next and this will no doubt be leading many to question whether to invest in a country experiencing such fundamental political uncertainty. But what does the market and the data say?
The aim of foreign direct investment (FDI) – cross-border investment made by residents and businesses from one country into another – is to establish a lasting interest in the country receiving investment.
So, UK inward FDI – net investments made by foreign companies in the UK – ought to be a pretty useful bellwetherto cut through the political noise.
However, there are two problems. Firstly, UK Government statistics on FDI are based on historic transactions so the latest numbers are only good up to 2017.
Secondly, when crunching the numbers on FDI, economists don’t seem to have a sensible way of distinguishing between foreign takeovers of existing UK companies on the one hand, and foreign investment in new plant or setting up new companies or branches and so on. Instead, it’s all lumped together.
In August, CK Asset Holdings, the Hong Kong property investment firm founded by billionaire Li Kashing, agreed to acquire UK pubs group Greene King in a £4.6bn deal.
This is but the latest in a string of foreign takeovers of British companies since the EU referendum, the most significant of which was world-leading software developer ARM, sold to Japanese firm Softbank for GBP24 billion. These have all been, essentially, foreign takeovers.
Looking at M&A enquiries and transactions, the last six months show a higher proportion of UK FDI. However, like Greene King and ARM, this is an overwhelmingly ‘takeover’ rather than ‘investment’ FDI. For the most part it feels like perfectly legitimate efforts to purchase star UK assets whilst sterling is cheap – and the UK is ‘selling the family silver’.
We ought not to be surprised. A deficit on a country’s trading account must be balanced by a surplus of equal size on its capital account. Since 1984 the UK has achieved balance by running a surplus on FDI, and where the statistics are useful is in showing that the bulk of this comes from firms in EU member countries, principally Germany, France and The Netherlands, comprising about GDP260b; and about GBP600b from the US.
The Brexit impasse could be paraphrased as: does the UK look to Uncle Sam or to the Northern European states for its FDI? Both present their risks and opportunities.
It seems the decision must be made and until it is, inbound UK FDI will disproportionately take the form of selling the family silver: a clear buying opportunity.
Once it is decided, the economic path of the UK will be set for decades to come.
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