As Albert Einstein once commented, the hardest thing in the world to understand is income tax. Perhaps UK politicians could have taken note given the events of the last fortnight in British politics.
Not three weeks ago, Prime Minister Liz Truss and Chancellor Kwasi Kwarteng announced an ambitious package of GBP46bn of apparently unfunded tax cuts. From the removal of corporation tax increases, to National Insurance and stamp duty reductions and – as it turned out most controversially – the removal of the top rate of income tax of 45 percent.
The fallout and response to these policies has been dramatic, resulting in subsequent U-turns, and financial and currency market turmoil. But are there now opportunities for Middle East investors into the UK, a country long seen as one of the region’s most stable and favoured trading partners and investment destinations?
The most obvious opportunity is as a consequence of the decline in the pound against the dollar – which has now reached near 37-year lows. This represents a year-on-year 20 percent discount on USD:GBP transactions which will stimulate property, corporate M&A and direct investments.
Lower corporation taxes also impact valuations positively for foreign investors with UK assets now appearing to be extremely well valued as a result. Currency deterioration and global, market-linked declining corporate / asset valuations across the board are also key contributors.
This may not be a one-off buying opportunity either. The pound has been declining against the dollar for the last year and the government’s tax cuts, and associated borrowing, are not the only reasons for GBP weakness. Inflation was already rising in the UK, and when considered alongside the cost-of-living crisis, rapid increases in energy costs and the government borrowing associated with fiscal expansion GBP and the economy has been under pressure for some time.
Even with the just-announced U-turn on the poorly-judged, removal of the 45 percent rate tax cut (which, in reality, only represented 5 percent – or GBP2bn – of the GBP46bn tax cuts) the pound has only recovered some of its losses. Some commentators suggest that Sterling could reach parity with the dollar by the year-end.
So, what UK acquisition opportunities will be created?
The Middle East region will continue to seek to commercialise its own intellectual property, while also identifying transactions that help to import best in class skills, technologies and disruptive processes from the UK into this region. Sustainability, digital transformation and technology deals (from deep-tech and gaming, meta-space and AI to healthtech and fintech) will all be increasingly attractive.
And while the reasons mentioned earlier contributing to the fall in GBP may create short-to-medium term systemic risks, long-term investors of patient capital from the region will be identifying buying opportunities.
In January this year, as an example, the Saudi Arabian-backed Savvy Gaming Group purchased FACEIT (UK) as part of a $1.5 billion gaming spending spree. As companies in the UK tech sector struggle to continue to raise capital (without the dreaded ‘down-round’), liquidity from the region will continue to seek out attractive buying opportunities.
In fact, at Lumina, our cross-border M&A deal activity is already underpinned by the push for bilateral trade, with a number of significant regional investments into the UK already taking place. Post-Brexit, the UK government is seeking to make UK the choice destination for foreign capital and FDI inflows as a “low tax” / “low red-tape” jurisdiction.
Being closely connected to UK/Middle East international trade organisations, we are also seeing initiatives such as the recently announced Saudi-UK tech hub agreement between the Saudi British Joint Business Council and the MCIT in Saudi Arabia. These collaboration tailwinds are further expected to boost tech innovation between the region and the UK.
Sustainability has also been a key area of investment focus, with Masdar and ANDOC’s green hydrogen projects in Teeside announced a few months ago. Mubadala has also made a GBP10bn investment commitment into UK clean energy, infrastructure, technology and life sciences.
Will the implementing politicians be around to see the impacts of their policies on the UK economy? Time will tell. But for now – if you’re a patient USD investor – timing couldn’t be better to invest into the UK.
Andrew Nichol, Partner, Lumina Capital Advisers
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