The view from the Chief Investment Officer - Q4 2024

News: Insight & Opinion | 24 October 2024

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Whatever the landscape looks like ahead, navigating our way through it means picking investment opportunities very carefully and protecting downside wherever possible says CIO, Michael Mowlem

For some time now, there has inevitably been much speculation about the Budget, the first from the incoming Labour government. Whether CGT would be raised across the board or whether any relief would be provided for private equity investors (rewarding long-term investors through the tax system can help foster a more robust and sustainable economy - to paraphrase the Chancellor herself) has been exercising the minds of many in our industry and in the press. But while many of us here in the UK have been focused on the extent and scope of potential CGT (and other tax) changes, another major political event on the other side of the pond could have far greater consequences for global economies. The outcome of the US election looms large over the outlook ahead. 

Politics aside, broader investment decisions by private equity firms and investors are made against the backdrop of micro-sector trends and macro-economic factors.  Typically, the UK looks to the US for the economic direction of travel and the signs right now are promising.  US employment is generally stable, despite small spikes in US jobless rates reported in recent months. While these led to sudden and sizeable market corrections (which subsequently reverse more slowly), a recent study1 of US corporate profit margins suggested these were at highs not seen since the 1960s, and that therefore reductions in staffing levels are unlikely.  

The US interest rate cut in September, the first in four years, was also a significant turning point. According to research by Chatham Financial2, the average time interest rates remain at their peak before falling is 11 months - and encouragingly, this time around it took just two months longer than average for rates to be cut. Though the ball started rolling in Europe and the UK ahead of the US, this move by the Fed, coupled with expectations of a further reduction in November, suggests that more material reductions in Europe are likely.  Inflation is also down materially from the major spikes seen in 2022/2023 (the first for 40 years across the West) falling from almost 10% to between 2% and 3%, albeit with some continuing volatility amid oil price rises.  

These are positive indicators, and here at Connection Capital, we’re seeing them translate into an uptick in activity, with a wide variety of new opportunities across private equity, private debt, funds, co-investments and property.  We continue to look across our markets to find good quality prospects in niche areas where we can drive real growth and which offer potential for material outperformance, while also structuring deals to ensure downside protection. Our recent investment in Winder Power is a good example of this, and our current, extremely healthy, pipeline offers many more opportunities with high growth potential.  

The past few years have seen some extraordinary macro events, and despite recent improvements in conditions, the challenges are far from over.  For us, whatever the landscape looks like ahead, navigating our way through it means picking investment opportunities very carefully and protecting downside wherever possible. It’s an approach that yields rewards in good times and bad.