- Amid the pandemic, the digital economy emerges as top driver of future UK growth
- Only 10% of global Financial Services Firms are planning to establish or expand operations in the UK in the coming year, down from 45% in April
- However, 53% of Financial Services Firms now expect the UK to be more attractive for foreign direct investment (FDI) in three years’ time – up from 40% earlier in the year
LONDON, MONDAY 30thNOVEMBER 2020: COVID-19’s impact on the global economy has shifted investor priorities and is expected to have a significant impact on Financial Services Firms’ investment plans in the UK over the coming year, according to EY’s latest UK Attractiveness analysis for Financial Services.
While the UK has consistently led the rest of Europe in attracting overseas investment into Financial Services and has the continent’s most established Financial Services ecosystem, investor sentiment suggests FDI will slow for UK Financial Services over the next 12 months.
Last year investor sentiment firmly placed Financial Services as the driving force of UK growth, and the sector attracted 99 projects, equating to more than a quarter of Financial Services FDI in Europe. However, the latest survey indicates that amid the pandemic investors are looking to prioritise investment in the digital economy, with the real estate industry – which is likely to have benefitted recently from the Government's infrastructure ambitions – and the healthcare industry also rising in prominence, at least in the short term.
Investor sentiment on short-term investment plans into the UK has fallen over the course of this year, and the number of overseas companies planning to invest in the next 12 months has dropped to 25% from a ten-year high of 31% in April. Within Financial Services, there has also been a fall, and only 10% of overseas firms are now planning to establish or expand their operations in the UK in the coming year. This is significantly down on the 45% cited in EY’s last survey carried out in April this year; and even marginally down on the 11% in 2019 when Brexit uncertainty was at its peak, heavily influencing sentiment.
Twenty percent of the Financial Services Firms surveyed have said they’re now planning a substantial decrease in investment in the UK over the next 12 months due to COVID-19, with a further 28% planning a minor cut; 18% said they’re putting plans on hold for the time being. Positively, 23% of respondents have said they expect no change to their investment plans, and 10% say they plan to increase investment.
Omar Ali, UK Financial Services Managing Partner at EY, comments:
“UK Financial Services entered the pandemic in a very strong position, having led the rest of Europe in attracting overseas investment over the past 20 years. Our latest research shows, however, that industry sentiment has dipped, and a significant proportion of global investors are currently viewing sectors like technology and real estate as bigger drivers of UK growth, with interest in healthcare also rising. In some respects, this isn’t surprising given COVID-19 and the sudden shift to remote working and the urgency of finding a vaccine. However, the shift in short-term investment plans suggests the lack of clarity about the relative importance of UK Financial Services in Brexit negotiations and trade discussions, and the future of the economy may have started to affect investor sentiment.
“This research was conducted before the Chancellor set out his vision for the Future of UK Financial Services earlier this month. Hopefully the Chancellor’s commitment to review the listings, fund and overseas regimes, along with the launch of a new National Infrastructure Bank and Long-Term Asset Fund as well as the ambitious vision for making the UK a global leader in Sustainable Finance, will go some way to improving investor sentiment and ensuring the UK retains its dominance in attracting FDI.”
Digital forges ahead as key driver of UK economic growth amid COVID-19
National lockdowns and the shift to mass remote working have meant the digital sector is now seen by global investors as likely to be the biggest driver of future UK growth. Sixty-six per cent of Financial Services firms surveyed believe this to be the case, up from 31% in 2019.
Ranked second is the real estate and construction sector with 30% of Financial Services respondents, up from 10% last year. And perhaps unsurprisingly amid a pandemic and the urgent work to create a vaccine, the healthcare sector has also increased in prominence for overseas investors, placing joint third with 28% of Financial Services respondents saying this sector will drive future UK growth, up from 10% in 2019.
The Financial Services industry, which was seen as the sector most likely to be a principle driver of growth last year, now occupies joint third place with healthcare in the list of key growth sectors, with 28% of Financial Services respondents expecting it to drive future UK growth, down from 46% in 2019.
Long-term sentiment around UK and European FS attractiveness improves
The latest foreign direct investment (FDI) figures (2019 data) shows UK Financial Services entered the pandemic in a position of strength, attracting the most overseas investment for a single country, and leading the rest of Europe by a large margin. The UK recorded 99 projects in 2019 - more than double that of second placed Germany. Despite the short-term dip in sentiment in this latest survey, Financial Services investors believe the UK’s attractiveness over the next three-years will continue to improve.
Over half of Financial Services companies surveyed (53%) now expect the UK to be more attractive for FDI in three years’ time, which is up from 40% earlier in the year and 17% in 2019 when investor sentiment was at an all-time low due to Brexit and wider political uncertainty.
This is in line with broader Financial Services investor sentiment about markets across Europe (including the UK): 56% of Financial Services investors surveyed think markets across Europe will become more attractive for FDI.
COVID-19 set to impact business strategies and Financial Services returns – both now and in the future
The COVID-19 pandemic is also set to have a significant long-lasting impact on business strategies and operating models. Almost three-quarters (73%) of Financial Services respondents say the most important theme in their investment strategy is how city centre economies will change because of COVID-19.
The second most important theme, cited by 60% of Financial Services respondents, is the ability of the companies they invest in to use technology to transform their operations – likely to have risen in importance due to the shift to virtual working. The third theme (45%) is the extent of digital customer connectivity.
Priorities for future locations have changed in the wake of the pandemic
What is important to Financial Services Firms when looking at future investment locations has shifted since the start of the pandemic. The quality of government support that can be accessed if needed has become a top priority, cited by 45% of respondents, up from 30% in April. The second priority is the safety and security measures put in place to prevent a future major health, cyber or environmental crisis, cited by 35% of respondents in both 2020 surveys. The third largest priority is the reliability and coverage of infrastructure, cited by 33%, up from 25% in April.
The most significant change in investor priorities since April is the decline in importance of the liquidity of capital markets and the availability of capital, which has dropped from 40% in April to 10% in the latest survey.
Omar Ali concludes: “Our sentiment survey has shown that the main strategic priority for Financial Services investors now is the quality of government policy and support for the economy. Government lending schemes, the Bank of England measures to support lenders, the Treasury Select Committee inquiry and announcements from the FCA and PRA, combined with the Chancellor’s vision on the Future of Financial Services are evidence of a renewed focus in the UK on Financial Services. The hope is the industry is now seen as an asset in terms of both our status abroad and tackling the impact of COVID-19. Delivering on the listings review, funds review, and on sustainable finance ambitions, as announced by the Chancellor, will bolster investor confidence. With Brexit negotiations reaching a critical point, it’s vital that the Government, regulators and Financial Services sector continue to come together to make sure the UK retains its position in the eyes of investors as the leading European Financial Services centre.”