Investors, prepare for a birighter future

Investors can prepare for a brighter future

Choppy market conditions until the end of the year are likely to calm , creating a brighter economic outlook and atttractive long-term opportunity. Peter Cooper, account manager at OCM Wealth Management, explains.

The Covid pandemic has seen many over-50s voluntarily leave the labour market and take early retirement. The same is happening with business owners with business sales increasing, says corporate finance specialist Tom Pollard.

Following the market euphoria of the post-pandemic recovery in the economy in 2021, 2022 has been anything but plain sailing for investors who have had to grapple with multi-decade high inflation, rising interest rates and European energy insecurity, with speculation over all of the above weighing on the global economy.

It is clear that market conditions remain exceptionally challenging in the short term, with more volatility seemingly inevitable. However, as interest rates move closer to peak expectations and economic data trickles through into labour markets and inflation figures, data is beginning to suggest that things may be starting to look up for investors.

As inflationary concerns, monetary tightening and geopolitical tensions continue to weigh on market sentiment, multi-asset investors have been faced with an unprecedented challenge this year as rising interest rates tarnish the safe haven status of government bonds, decoupling their historical negative correlation to equities. Both equity and bond markets have experienced their worst three quarters in 40 years. However the data is beginning to suggest that a brighter future lies ahead.

Rising inflation has not only weighed on market valuations in recent months but also on the consumer’s pocket. Driven by a rapid reopening from the pandemic and fuelled further by surging commodity prices as a result of Putin’s war in Ukraine, inflation remains one of the biggest headwinds investors face in 2022. Domestically, labour markets have applied upward pressure on inflation through persistent wage growth, unemployment rates remaining resilient and a strong demand for workers. The robustness of labour markets alongside solid consumer balance sheets in comparison to previous economic slowdowns has paved the way for central banks to begin the most aggressive tightening cycles seen in recent times.

The USA remains a relatively bright spot in the global economy, given the haste at which the Federal Reserve System began to tackle inflation but the key task will be bringing inflation back to target without causing a sharp downturn in the economy.

Consumer demand represents around 70 per cent of the economy and demand destruction through a rise in unemployment is crucial to the slowing of the economy. The difficulty for the Fed is that unemployment acts as a lagging indicator, therefore raising the risk of the central bank overtightening and ‘engineering’ a recession. Should the Fed overtighten significantly, a substantial rise in unemployment and a sizeable drop in consumer spending could tip the economy into recession, feeding through to the UK and European nations and worsening the global economic growth outlook further.

However recent data has pointed to a slight easing of labour market pressures. When combined with cooling commodity prices, headline US inflation levels have begun to cool in the United States, potentially offering the Fed room to manoeuvre.

Headwinds remain in place in the UK and Eurozone economies, with natural gas supplies via the Nord Stream pipeline ceased for the foreseeable future. Russia has continued to escalate its war in Ukraine with the illegal annexation of territory, to which Europe has responded with an eighth sanctions package including an oil price cap, posing further risk to energy supply.

Questions remain over how Europe will refill its natural gas reserves in early 2023, with limited supply alternatives pushing wholesale prices up further, weighing on inflationary pressures.

In the UK, political uncertainty and a tug-of-war between monetary tightening and fiscal loosening continues to fuel volatility in government bond markets and the pound. While recent inventions from the Bank of England have provided some stability to markets in the near term, the Central Bank is likely to have to raise rates more aggressively as they look to tame inflation.

Q2 corporate earnings in the US largely surprised albeit very low analysts’ estimates and the upcoming US earnings season is likely to provide an insight into how businesses are coping with rising input costs alongside consistent wage growth. Early signs have emerged of better than expected performance from companies which have passed on rising costs to the consumer, a trend which if it continues through this quarter will likely raise risk appetite. The risks facing multi-national businesses remains the overwhelming strength of the US dollar which has outperformed significantly throughout 2022, with investors rushing to safety following the conflict in Ukraine alongside interest rate differentials as the Fed fights to bring inflation back towards its 2pc target.

Recent data shows three straight months of declines in US inflation, as energy and food prices cool amid recessionary concerns. As such, traders continue to bet on a Fed pivot in 2023 as interest rates move closer to the 4.75pc expected peak and, despite officials confirming their intent to leave rates elevated, it is our view that a Fed pivot is likely and will provide a significant boost for risk assets.

While the timing of this pivot is uncertain, investors will be looking for clues within data releases throughout Q4 to signal that rate hikes are taking effect in slowing down the economy, giving central banks room to breathe.

Overall, it is our view that as we see asset valuations more accurately reflect economic headwinds moving forward, investors are presented with an opportunity to deploy cash more efficiently with a long-term investment horizon.

While markets remain sensitive to economic data in the near term, providing volatility and risks for investors with a short-term outlook, we believe that key drivers of inflation will cool into next year, giving central banks room to apply the brakes on their tightening cycles. Our view, therefore, is that a brightening economic outlook and current market valuations provide an attractive long-term opportunity. While our flagship OBI portfolios remain somewhat cautious in nature to manage near term risk, we expect investors to enjoy a brighter future as economic headwinds ease moving into 2023, with renewed sense of optimism and risk appetite likely to provide a welcome boost to investors’ portfolios.

Enough is enough: Business owners are driving rise in M&A

The past three years have seen some of the toughest trading conditions in recent memory. Business owners hoping for a period of stability against a global backdrop and upheaval and uncertainty and the pandemic have been sorely disappointed, struggling with soaring energy prices and a cost of living crisis. Uncertainty continues to dominate the economic landscape. Just as many over-50s in fulltime employment have taken early retirement, we are beginning to see the same with business owners of a similar age. They have seen high interest rates in the 1990s, the financial crash in 2008 and the uncertainty that continues to surround Brexit. The global pandemic and now conflict in eastern Europe have made for an exhausting trading landscape. Many business owners have had enough and are choosing to sell, taking early retirement or in order to explore new interests. It is matched by renewed interest from overseas investors, with the current lowest level of the pound against the US dollar since 1985 making the UK an attractive market for investment. Selling a business, however, takes time - often six months or more, with a process to follow to achieve the greatest value. It is, for most, a oneshot chance. Unless they are a serial entrepremeur, it is unlikely that a business owner will have sold a business before. It is also likely that a business looking to make acquisitions will have made previous acquisitions or will be of sufficient size to bring in a team of experienced merger and acquisition advisers, lawyers and corporate financiers. With a sophisticated buyer, the seller needs an equally sophisticated adviser, someone who understands both the sale and acquisition process. A good adviser will do more than guide a business owner through the sales process. They will help business owners and the business to be appropriately prepared for the sale, helping to generate the highest possible sale value. They will foresee where challenges may lie and how they can be addressed to ensure a smooth sale. They will be supported by a team of specialists who can offer, for example, tax advice, and, importantly, give you the time to continue to run your business. Equally important is an adviser who recognises the emotional pull of selling a business that you may have built over many years, understanding that it is not as simple as ‘retiring’ from a job. There are several stages to a sale process that your adviser will guide you through but before that starts they will help you to prepare your business for sale. They will work with you to see if there is anything that may impact the company’s valuation, ensure accounts are in order and everything is ready for the due diligence stage. This can take time, particularly if any pre-sale restructuring is needed, such as the sale of property. When ready, an Information Memorandum will be prepared, providng interested buyers with key information about the business for sale. A shorter anonymised teaser document will also be prepared for the initial marketing of that business. Your adviser should have access to potential targets they can approach anonymously on your behalf. They will also work with you to identify potential targets - many acquisitions are made by organisations known to the business owner. The aim is to create a list of potential buyers before moving to the next stages which, after signing the appropriate non-disclosure agreements, will include sharing the information memorandum and faceto-face meetings. At this point serious buyers may come back with an offer. Offers take many forms, including an outright cash sale, deferred sale if specific targets are met or requiring the business owner to remain in place to facilitate a smooth transition of ownership. Once an offer is made, the heads of terms - which formally sets out the terms of the offer - will be agreed by both parties. The buyer will commence due diligence and, assuming the outcomes are satisfactory, both parties will agree the particulars of the deal. This is, of course, a much-simplified overview of the sale process. Every business sale will be different and will face different challenges and hurdles. Having advisers who recognise those challenges, with the experience and technical knowledge to get a deal over the line, will help ensure the best possible outcome for you.

Peter Cooper

Tom Pollard

n Tom Pollard is a director in the corporate finance team at accountants Mercer & Hole. email tom.pollard@mercerhole.co.uk or visit www.mercerhole.co.uk.