Last Week In Review: A Financial Roundup
As golden age for private capital ends, 2024 heralds more consolidation
The private equity industry is expected to face challenges in 2024 after fundraising fell to a five-year low in the last 12 months. Capital raised by private capital funds fell by a third, from a peak of $1.7trillion in 2021 to $1.1trillion by December 2023, triggering the need for diversification and intensified competition.
The number of funds closed in 2023 was the lowest since 2014, signalling a potential consolidation in the alternative asset managers’ space. Infrastructure was hit hardest by the decline in fundraising, with private debt continuing to be one of the more popular strategies accounting for 16% of all capital raised.
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Britain and Switzerland agree wide-ranging financial services trade deal
The UK and Switzerland have signed a comprehensive financial services deal that aims to boost trade, reduce compliance costs and facilitate reciprocal market access for their respective financial sectors.
Coming after two years of negotiations the agreement formalises and expands existing cross-border regulatory practices, focusing on wholesale activities and private wealth management.
The deal, which still requires parliamentary approval in both countries, is set to boost the UK’s financial services industry after Brexit cut off much of its business within the EU.
Swiss Finance Minister Karin Keller-Sutter highlighted the deal’s potential to enhance the competitiveness of Switzerland’s financial centre.
The mutual recognition approach allows for both countries to operate in either market following one set of rules without needing to open a branch or subsidiary.
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New pressure to cut interest rates as UK economy falters and US inflation dips
Central banks in the UK and the US are facing renewed pressure to cut interest rates in early 2024 due to concerns about a potential recession in the UK and a drop in US inflation.
The BoE is expected to face demands for lower borrowing costs after official figures showed a tightening of monetary policy, pushing the UK economy close to recession.
The UK’s GDP fell by 0.1% in Q3, revised from a previous statement of no growth.
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UK Mergers and Acquisitions Witness 33% Decline, Lowest Levels Since 2009
The value of UK mergers and acquisitions (M&A) hits its lowest level since the financial crisis, reaching $265.4 billion in 2023, a 33% drop from the previous year, according to LSEG Deals Intelligence.
A total of 5,500 deals were announced, a decrease of 19% from 2022. The decline is attributed to factors such as higher interest rates, geopolitical tensions and economic uncertainties and reflects caution from both domestic and international investors.
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Rate rises hand European banks a €100bn windfall
European banks have experienced a €100 billion windfall from rising interest rates over the past two years, increasing net interest income (NII) to an estimated €378 billion according to UBS.
Despite the boost, a persistent valuation gap remains, with most banks trading at steep discounts to the book value of their assets and US peers. The earnings improvement allowed European banks to raise dividends and buybacks to €121 billion for 2023 from €90 billion in 2021. However, concerns arise as central banks may start cutting rates in March, potentially pressuring net interest margins (NIM).
UBS forecasts €63 billion in loan-loss provisions for 2024, up from €31 billion in 2021. While some investors remain optimistic, Morgan Stanley's CEO anticipates the European valuation gap to narrow in coming years.
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Britain to outgrow Germany for years to come as eurozone growth engine stutters
Analysts at UBS predict that the UK’s growth will outpace that of Germany and the eurozone for years, despite the risk of a recession in both the UK and Germany.
UBS expects the UK to bounce back within a year, with a growth rate of 0.6% in 2024 and 1.5% in 2025, while Germany is expected to grow by 0.5% and 0.8% respectively.
UBS anticipates the eurozone as a whole to expand by 1.2% in 2025 with the IMF predicting the UK will outgrow Germany until 2028.
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We are losing lots of companies – if we do nothing the UK market will fade away
Cheaper UK share prices sparked a rise in takeover premiums and have led to a higher influx of foreign buyers acquiring London-listed companies, Investment Bank Peel Hunt reports.
The proportion of overseas buyers reached 55% in 2023, breaking the traditional 50/50 split with UK buyers. Last year, buyers paid an average premium of 50% surpassing the 30%-40% average of the past decade significantly.
The UK Smallcap index has also seen 30% of companies leave the market over the past five years and the overall value of the index has dropped by some 50%.
Charles Hall, Peel Hunt’s Head of Research, warns that the higher premiums indicate undervaluation, prompting companies to seek better valuations elsewhere.
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UK debt chief warns excessive borrowing risks investor backlash
CEO of the UK’s Debt Management Office has cautioned British politicians against rapidly increasing borrowing, warning of potential market backlash.
Stheeman, who oversaw an eight-fold rise in the UK’s debt pile during his 21 years in the role, emphasised that policy decisions cannot be divorced from market realities. His comments come as political parties prepare for general election with public borrowing likely to be a key focus.
The head of the DMO highlighted investor sensitivity to government borrowing levels, citing the gilt market crisis following former Prime Minister, Liz Truss’ “mini” Budget in 2022. He went on to note the importance of maintaining an independent relationship with the market to best serve taxpayers.
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Gold demand hits record high amid global turbulence, says Royal Mint
The Royal Mint reported a 7% YoY increase in the number of people buying gold and precious metal bars and coins in 2023, surpassing the 2020 lockdown investment boom. The surge was attributed to investors seeking “safe-haven” assets amid geopolitical and economic turbulence.
Total payouts to customers selling back their bullion increased by nearly half as gold prices hit an all-time high.
Royal Mint Analyst, Stuart O’Reilly anticipates gold prices reaching new records in 2024 due to potential central bank interest rate cuts, reducing the appeal of other investments.
The Royal Mint noted a 19% increase in customers selling gold investments back in 2023, with 46% higher total payouts compared to 2022.
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