Low pound attracting international business buyers

Tue, 12 Jul 2016 | BUSINESS NEWS

Since the Brexit vote in the EU referendum on 23 June, the pound has dropped around 13.5 per cent against the dollar. And with such a decrease in relative value, the chance for foreign investors to acquire distressed UK businesses at a steep discount will prove extremely attractive.

To make a valid comparison, which may guide us in the coming months and years, we have to look back to the 1930s. After the devastating Wall Street Crash in 1929, Britain left the much-heralded gold standard in September 1931, which led to panic in the markets and caused sterling to fall around 30 per cent before finally bottoming out in December that year.

Only at that point, some four months after coming off the gold standard, did foreign investors decide that the pound was cheap. They then came in their droves, buying businesses, property and assets to such an extent that there was a rapid expansion in broad money and Britain went on its fastest growth spurt of the 20th Century over the next six years.

At our current point in history, in mid 2016, the pound would have a long way to fall to exactly match the situation of the 1930s. However, with a similar if milder crash occurring in 2008, followed by a dramatic fall in the relative value of the pound a few years later, we may yet see a similar yet milder situation repeat itself.

However, the current overall economic situation is far less gloomy than it was in the 1930s — recent numbers have shown that the United States is continuing to lead the global recovery from the financial crisis of 2008; eurozone growth has been far more robust that many analysts were initially predicting; and China is still defying the odds by continuing to grow, although admittedly at not quite such a furious rate as it was in recent years.

On the plus side for Britain, the devaluation of sterling has provided an opportunity to grab a bigger slice of global demand without exposing itself to international condemnation. The drop in value could also be beneficial because the pound had previously been running too hot, which was harming manufacturing exports, for example. Now, the pound's devaluation provides the ideal opportunity to rebalance the economy away from a purely consumption-dominated model and back towards manufacturing.

While we are unlikely to see the pound lose 30 per cent of its value compared to pre-referendum levels, it follows that the benefits of sterling devaluation will not be as stark as they were back in the 1930s for other reasons too. This is mainly because modern British exports, from high-end manufacturing to financial services, are much less price sensitive than other, more traditional export goods.

Nevertheless, it is relatively certain that, with the pound dropping, foreign investors will be keeping a close eye on opportunities to buy British businesses before the predicted growth spurt occurs. With distressed and more financially sound businesses being available for up to 20 per cent less in a cheapened currency, the opportunities for foreign investors will, we predict, be too attractive to ignore.


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