As we try or best to navigate the tumultuous financial waters the coronavirus pandemic stretched before us, UK investors can’t help but wonder about the long-term effects of this ongoing crisis. The Organisation for Economic Co-operation and Development (OECD) recently stated the UK could be one of the major economies to he bit the hardest by the COVID-19 economic crisis.
In their statement, OECD mentioned the UK’s economy is likely to drop down by 11.5% this year, compared to 6.6% in Germany and 11.1% in Spain. This scenario only considerers a single pandemic wave, but if a second peak is taken into account, Britain’s economy could contract by as much as 14%.
Even though these are just predictions, a closer look at the current situation reveals these suppositions may be closer to reality than we imagine. In the first three months of 2020, the country’s economy shrunk by 2.2%, representing the sharpest decline since the third quarter of 1979.
The fact that officials are still struggling to predict the outcome of the largest outbreak happening in the modern era leaves individuals, businesses, and investors wondering what their next move should be. Investors, who spend most of their time trying to anticipate how the market moves, are now faced with a challenging environment, finding it harder and harder to accurately foresee what the road ahead holds.
Investor Behaviour is Changing
Over the course of the first three months of 2020, there were only 344 announced equity deals made into private UK companies. This marks a 32% decrease from the last quarter of 2019. Compared to March of 2019, where 174 deals were announced, March of 2020 only brought 95 of these deals.
These numbers reveal investors may have started to reconsider investing in new companies and focusing their funds towards their current portfolio. This was the first change in investors behaviour spotted by financial experts, but it is by no means the last.
A closer examination reveals investors may take longer to close deals, especially those going through the due diligence process, which can take months to complete under normal circumstances and can take even longer now.
Many investors are now taking a wait-and-see approach, meaning they won’t be keen to seek new investments and enter new deals.
Investment Trends Over the Coming Months
Based on the data above, here is how we believe the investment market is going to change in the following months:
Investors will be taking a more cautious approach
Risk management is key during times of financial uncertainty, which means investors are more likely to think twice before closing a new deal, no matter how promising it sounds. This will cause many deals to either be delayed or entirely dropped over the next couple of months.
Little to no new portfolio additions
A trend that has been continuously spotted in times of financial crises is for investors to focus on their current portfolio, rather than seeking new additions. This means investors will be more likely to pour capital into existing investments, in an attempt to keep those companies going.
Switching to venture stage funding
Compared to seed-stage businesses, which have just launched and are now trying to work on their proof of concept and may represent a riskier investment, venture-stage businesses are going to see a lot more interest from investors. That is because they have already proved they have a feasible service or product, and early-stage investors will be more interested in that.
Is There a Safe Haven?
All financial sectors have been affected by the ongoing crisis, and investors know that better than anyone. However, there is one financial market that seems to be less affected right now – the foreign exchange market. One important reason why this is happening is that the pandemic has actually managed to bring back volatility for the forex market, which attracts more and more high-risk investors.
The UK Forex trading market is the largest in the world, and because people are now staying at home more, there has been an increased interest in forex trading in the past few months.
Could it be that the forex market is a safe haven for investors that are looking to expand their portfolio in these times where nothing seems to be going as expected?
While we might be tempted to say yes, only time will tell. But for now, the forex market is surely enjoying the volatility it’s been starving for, for a while.
How cautious should investors be during this period?
While optimistic investors are waiting to see that V-shaped chart, which represents a rapid bounceback in the economy, the OECD advises it may not be the case. We will be witnessing what is called a U-shaped chart, with one main question remaining: How long are we going to be at the bottom of the U?
The OECD also has some good news for the UK, as their predictions show it will be the nation with the strongest growth in 2021, provided we won’t be facing a second wave of infections.
Investors should be cautious, but that does not mean they should hit stop on new investments and take an indefinite leave of absence. What is important now is that investors focus on investment themes that have the highest potential for growth right not such as healthcare, smart manufacturing, e-commerce, and sustainability. All of these industries are proving to be of great help to fight the pandemic and return to normal and need as much funding as possible.
As we try to win a battle on uncharted territories, technology and science are the two industries more likely to see a growth in investments right now. They will be closely followed by e-commerce, as individuals are recommended to not leave the house unless necessary and avoid overcrowding brick-and-mortar stores.
If there is one piece of advice we want to give investors, that is to focus on innovation. Seek out investment opportunities that reveal an outside-the-box approach and provide strong contingency plans. Necessity is the mother of innovation, so we could be expecting to see a lot more new approaches to current problems in the following months.