For only the second time in the ten years that we’ve been studying UK attractiveness, we conducted two sentiment assessments in the same year. Our results reflect the unprecedented change and uncertainty seen in 2020. Overall, investor sentiment on short-term investment plans into the UK has dropped since April.
This fall is perhaps unsurprising. At the time of interviewing investors (September 2020), economic sentiment had dipped as growth across the economy started to fade after a record recovery over the summer, and the Government started to introduce new restrictions to try and mitigate a second spike in COVID-19 cases. This undoubtedly would have impacted the confidence of firms in making future investment plans. The UK is not alone, economic uncertainty across the world is expected to impact future FDI.
It was, however, disappointing to see that the short-term sentiment of financial services firms has fallen further than many other sectors. In April, 45% of firms were planning to establish or expand operations over the coming year in the UK, but by September, this had dropped to only 10%. This is even marginally down on the 11% recorded in our 2019 survey when Brexit uncertainty was at its peak and heavily influencing sentiment. Alongside this, 48% of financial services firms have said they’re now planning a decrease in investment in the UK due to the COVID-19 pandemic, whilst only 10% are planning to increase investment.
In the short-term, the digital economy is seen as the biggest growth driver in the UK, overtaking financial services which has held the top spot for a number of years, and has now dropped to joint third place, with healthcare. Real estate and construction holds second place, which is likely to have benefitted recently from the Government’s infrastructure ambitions.
When combined with the fall in short-term investor sentiment, it would be easy to look at these results and conclude that the UK’s poll position for financial services in Europe is under threat. But it’s important to remember both the context and the current environment in which we’re operating.
The UK has consistently led the rest of Europe in attracting overseas investment into financial services, and in 2019 took more than a quarter of European FS investment. The UK has Europe’s most established financial services ecosystem and while, as an important indicator of future FDI, this short-term sentiment shouldn’t be ignored, it’s encouraging to see that over half of FS companies (53%) now expect the UK to be more attractive for FDI in three years’ time, despite no confirmed Brexit deal at the time the research was undertaken.
Equally, the rise of healthcare and digital this year shouldn’t be surprising, given the COVID-19 pandemic. With many working from home and the urgent work to create a vaccine, investors are rightly expecting growth in these sectors. This doesn’t necessarily spell bad news for financial services in the long-term. A stronger healthcare industry will support the life and pensions sub-sector and investment in the digital economy will help financial services in reaching more customers through digital platforms and in helping to reduce costs.
How should we then interpret this dip in investor sentiment? Our results show that nearly half of financial services investors ranked the quality of Government policy and support for the economy that can be accessed if needed as a top priority when looking at future investment locations (up from 30% in April). Until a couple of weeks ago, we hadn’t heard the Chancellor’s plans on the future of financial services in the UK, and the continued lack of certainty surrounding Brexit negotiations and trade discussions are likely to have impacted sentiment at the time investors were polled.
We’ve now seen a renewed focus in the UK on the future of financial services. The Treasury Select Committee inquiry, and announcements from the FCA and PRA, combined with the Chancellor’s vision on the future of financial services all show that Government and broader policymakers are working together to ensure that the UK remains competitive. Delivering on the listings review, funds review, and on sustainable finance ambitions, as announced by the Chancellor, will bolster investor confidence, and our hope is that we will see this come through in our next investor sentiment survey.
Now more than ever, it’s vital that the Government, regulators and the financial services sector continue to come together to create a coherent framework for financial services. This will ensure the UK retains its leading position in the eyes of investors, which will support growth and investment in a sector that will be essential to the economic recovery of the UK post COVID-19.