Understanding investor sentiment: optimism for SMEs in Brexit uncertainty

Brexit and investor confidence
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Luke Davis
CEO
IW Capital
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In the immediate aftermath of Britain’s decision to leave the European Union (EU) and the weeks that followed, we witnessed numerous high-profile political reshuffles and resignations, including that of the now ex-Prime Minister, David Cameron. Since the referendum result was announced on 24 June, markets have fluctuated considerably, with the value of the pound hitting a 31-year low against the dollar earlier this month.

Although unrest is inevitable during periods of such significant upheaval and confidence levels often waver as a result, ultimately it is confidence that is needed – especially from an investor perspective – to rally behind our nation’s growing businesses in times of uncertainty.

In both the lead up and aftermath of the Brexit announcement, SME confidence levels have been mixed to say the least. The Federation of Small Businesses (FSB) stressed to policy makers that it was of paramount importance to improve the ease of doing business following the referendum, as business confidence levels declined to a four-year low in the days before the ballot.

The Business Growth Fund’s Growth Climate Index, however, painted a more optimistic picture of SME sentiment, with 74% of UK SMEs still believing that Britain is a great place to start and grow a business, regardless of the EU referendum result.

As small to medium-sized enterprises account for 99.9% of businesses in the UK’s private sector and employ around 15.6 million people, our economy is reliant on their development, which could well be hampered by insecurity and uncertainty in the current climate. But for entrepreneurs, knowing there is investor appetite in their sector and available funds for them to tap into will be key to giving them the conviction to pursue their growth plans.

We commissioned research earlier this year – prior to the referendum result – which showed immense investor confidence in UK SMEs’ ability to progress. At the time, 63% of investors said they would invest in small to medium-sized businesses in the next five years, with 71% of investors with over £40,000 in investment value confident in SMEs’ growth capabilities. But following Brexit, has investor sentiment remained positive, or has the cloud of uncertainty dampened their spirits?

Research published earlier this month by Lloyds Bank revealed investor sentiment towards assets including property, shares and government bonds plummeted in the wake of Brexit. In mid-July, the high-street bank noted that its Investor Sentiment Index had plunged to the lowest level since its launch in March 2013, with attitudes towards property declining by 35.36% between June and July 2016. During that same period, sentiment in relation to UK shares also dropped by 21.75% and fell in relation to government bonds by 15.58%.

Knowing there is investor appetite in their sector and available funds for them to tap into will be key to giving entrepreneurs the conviction to pursue their growth plans.

Up until now, however, an area yet to be fully addressed has been confidence levels towards private investment into SMEs and whether appetite remains high for our growing businesses post-Brexit.

To gauge this, we recently commissioned research – titled Understanding Investor Sentiment in the Wake of Brexit – by surveying a nationally representative group of 2,000 UK adults, including both investors and consumers. We asked them whether they were confident of the financial implications Brexit could have on the FTSE, property and the value of the pound, as well as their attitudes towards SME investment following the decision to leave the EU. The results relating to SME confidence were resoundingly positive, with the majority of investors (52%) saying they would consider supporting UK SMEs in the current climate – equating to 13 million people across Britain.

The younger age bracket of investors surveyed, those aged 18-34, were the most willing to back SMEs, with 70% saying they would consider investing. In a geographical comparison, Londoners proved to be the most supportive of growing businesses, with 68% of investors in the capital saying they would consider backing SMEs following Brexit.

Despite the current political and economic uncertainty, the high level of investor confidence towards SMEs uncovered in this research is reassuring for the long-term prospects of the UK’s SME community in the wake of Brexit. Although Britain was left in an initial state of limbo following the decision to leave the EU – due to factors such as no definite date being set for the new Prime Minister Theresa May to invoke Article 50, and the long-term economic implications of Brexit still hanging in the balance – our research depicts a nation still optimistic about its SMEs’ capabilities.

Although the study revealed that Britons were not confident in the long-term implications on the FTSE (55%), the property market (52%) or the security of the pound (49%), what we can take from the results is that there is a silver lining from a business perspective; the majority of our country’s investors are willing to back small to medium-sized enterprises, something that cannot be said for the other investment classes studied in our research.

What’s imperative now is support for those investors and for businesses looking to grow. As the FSB stated, improving the ease of doing business should be a priority, but without investor backing, it’s very difficult for companies to be confident in how they can actually do business and progress.

It’s now our job as investment providers, and partly the responsibility of the newly formed Cabinet as well, to ensure investors are equipped with the right tools, information and guidance to enable them to act on their investment decisions.

Our economy and our employment opportunities depend heavily on the health of our SME community and the SME community depends on the appetite of investors, so the results from our research can hopefully appease any concerns that business owners have following Brexit. In the coming months and years, we have to embrace the positivity and optimism of investors, and make sure they have access to promising companies. Failing this, we risk stifling business growth and, in turn, our economic progression during this transitional period.

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