Market Analysis – Q1 2024
This is the first question to ask in strategic planning 101. In order to plan for the future, you need to understand your current circumstances. Step one usually revolves around an analysis of opportunities and threats in the external environment set against internal strengths and weaknesses. Once you’ve all stopped laughing, I’ll continue…
Here’s the rub, more than two months into the new year, the economic outlook for 2024 is far from clear. Since 1st January, there has been a barrage of conflicting information. Looking specifically at expectations for the London market, some say that there is a strong IPO pipeline: Air Astana, the Kazakhstan airline, and London Tunnels have announced its plans to float in London this year alongside technology companies Raspberry Pi, cybersecurity group Quantum, and ClickASnap, which are all said to be working towards a London listing. Others say that the best companies, like Flutter Entertainment, Arm, Kaspi and Birkenstock, are choosing the US markets over London, while others still say that the lower cap (and vastly undervalued) companies – described as “sitting ducks” by The Times’ Alistair Osborne – will be picked-off in an M&A boom led by overseas companies, and according to Peel Hunt, market activity will “inevitably” pick-up as institutional investors start to sell-off companies in their portfolios to meet redemption requests after 30 months of outflows. There is no uniformity of view and the picture is confusing.
A glance at political, economic, social and technological trends impacting business only serves to highlight the capriciousness and unpredictability of the year ahead. Underlying destabilizing geopolitical factors have not diminished, in fact they’re getting worse with new disruption to supply chains in the Red Sea and increasingly disturbing signs from Russia and China. There will also be a swathe of elections around the globe that will have a game-changing impact on the direction and focus of influential economies, the perceived favorability of some industries and consequently a knock-on impact on the value of companies.
While falling inflation and reducing interest rates look promising for the economy – Lloyds Bank’s monthly business confidence index in January was up nine points on December, 2023, apparently the strongest start to a new year since 2016, Deloitte has announced it is planning to cut 100 jobs because of reduced dealmaking and the Federation of Small Businesses reports that smaller companies are planning to reduce staff numbers this year rather than expand their workforces. Worryingly, the Insolvency Service announced that the number of insolvencies in the last three months of 2023 reached levels not seen since the 2008 financial crash.
A consensus of financial institutions predict that the UK economy won’t see growth above one per cent until 2025, and despite the falling base rate, NatWest and the Halifax have raised the fixed-rate interest on some of their residential mortgage products, indicating that the squeeze on the household purse is set to continue for the foreseeable future with an inherent depression on consumer demand and the potential for more industrial action impacting employees, customers and businesses’ operations. Add-in the largely unquantifiable and seismic changes that climate change and AI will bring and attempts to understand market dynamics or obtain any measure of control over external factors look like a fools errand.
So, companies and their advisers should turn their attention inwards to their own strengths and weaknesses. Fortunately, the Financial Reporting Council have thrown us a bone to chew on with its proposed changes around internal controls in the UK Corporate Governance Code 2024, published at the end of January.
While the FRC has watered down some of its proposed reforms for listed companies around new duties for board audit committees and deferred other changes until 2027 (to avoid putting too onerous a burden on directors or scaring companies from listing in London), there are some important changes that address potential weaknesses.
Internal controls are becoming increasingly important and Provision 29 is a significant addition to the code. It both highlights the board’s accountability for internal control processes and provides guidance on how to provide evidence that those processes and controls actually work, which will improve transparency and give investor confidence a boost.
Executive pay and benefits are dealt with in a completely new Provision 38, that deals with malus and clawback and the circumstances in which they could be used. There is a significant shift away from a boilerplate approach to reporting, to instead focus on activities and outcomes which fits in nicely with the existing ‘comply or explain’ principle for companies to apply according to their own circumstances, which the FRC is encouraging. In fact, FRC Chief Executive, Richard Moriarty, says: “I’m keen for businesses and boards to think for themselves.”
With most of the code changes taking effect from 1 January 2025, and the new provision relating to internal controls takes effect from 1 January 2026, these reforms will give companies something concrete to work on this year.
Faced with a changeable year ahead, by focusing on internal controls, companies can at least ensure they understand their risks and tick all the right compliance boxes. Companies need to be in a position to pivot to take advantage of any opportunities 2024 may bring and they can only do that by being on top of the detail. Get your house in order and put your best foot forward in 2024.
This article was originally published in the Q1 2024 Corporate Advisers Rankings Guide. For more information, please contact Joseph Archer.
