Market analysis – Q4 2022
At the beginning of this month the Bank of England’s Monetary Policy Committee put up interest rates by the single biggest increase since 1989. Inflation is currently running at around ten percent, retail sales figures are on a sustained downward trend and a long recession is predicted. The total amount of money raised on the Main Market and AIM this year has fallen below £4,000m and is 43 percent down on 2021. All in all, these indicators aren’t painting a pretty picture. It remains to be seen whether the second financial statement delivered by the second Chancellor of the Exchequor in as many months, will inject a dose of confidence or inflict a new “moron premium” on the economy. Faced with such a topsy turvey outlook, what should Boards and their advisors be doing as we head towards 2023?
“Sometimes I sits and thinks, and sometimes I just sits”, said Winnie the Pooh. Now is the time to do the former rather than the latter. Understandably, in these turbulent times and with a very, very subdued UK market, many companies are choosing to wait until next year to IPO or raise finance. However, sitting out the market until things become more predictable, shouldn’t be confused with sitting on your hands. Uncertainty drives risk and companies need to stay as safe as possible.
The under-performance of the London market compared to other world markets this year combined with a weak pound has created a double-whammy bonus for potential foreign buyers, and from the US in particular, making UK companies much cheaper and putting them at greater risk of take-over. There have been some recent examples such as, Morrisons and Cobham, and there are more in the offing. Companies that are looking like a good bargain need to make sure their defences are in place before the barbarians come knocking at their door, and not rely on the limited options available to the Government under the Enterprise Act to object on management’s behalf.
Now’s the time to get a bit of self-perspective and manage the company’s position. Instead of keeping heads down to wait out the tough times, take a step back and have a think about where the company is and what it needs to do. For example, does the company need to be more defensive; shore-up its balance sheet; re-visit its cash-flow forecast, kick any liabilities down the road, sell any non-core or under-performing components, or review its risks? Other factors such as, ensuring the board composition and the experience of the NEDs complements both the executive team, and brings needed experience and skill to the board, should not be underestimated. If all of these are in a good position then the company is going to be much more able to manage future uncertainty and potential threats.
Identifying and managing new risks is key. For the last twenty years, the UK has benefited from very low inflation and interest rates and a stable sterling value. In the last couple of years, risks have materialised that would never have been thought possible. After three prime ministers in three months, political risk should now be put on the risk register and its impact factored in, along with other imponderables such as, the impact of a fluctuating exchange rate. Companies need to consider risks in far broader terms and ensure they have covered all eventualities, so they are more able to react in the event.
Not only is it a good time to review risks, but it would also be opportune to consider the company’s communication with shareholders. Nobody wants any nasty surprises or upsets. Companies need to be transparent about what they’re doing and why. If circumstances become difficult, but the business is strong, shareholders may be prepared to provide additional financing or support an emergency fund raise, but only if the company has kept them close. Equally, if the company becomes an acquisition target, it will need supportive shareholders that are not going to jump ship. This is often achieved by management communication of the longer term strategy and impact of value creation.
Companies that assess their risks, review their processes and do their due diligence will also be in a great position to take advantage of the opportunities arising from the turbulent markets. For companies that are well capitalized, now’s the time to be brave and use their paper to make acquisitions – there are always bargains at the bottom of the market (when we get there).
Good businesses with a strong proposition will still be able to float. There is always money out there, it’s just that when times are good investors are more prepared to take a gamble. Because of the uncertainty, businesses looking to IPO or raise finance will need to be more convincing and prepared for more robust scrutiny. Companies may be able to attract private equity investment as firms are still investing and sensing bargains, but without the need to report to the market.
Whether you are hoping to take cover during the storm or take advantage of the turbulence, it all comes back to having a firm understanding of your risks and processes. It is a truism that the only time people really stop to take a good look at themselves is when things are going badly – now is a good opportunity to sit and think.
This article was originally published in the Q4 2022 Corporate Advisers Rankings Guide. For more information, please contact Mark Ling.
