2008 presents a tougher market for firms selling into the UK market as GDP growth slows to 2.2% from 3.0% in 2007. Firms in the financial services industry may face the greatest challenges. Key questions are: Will UK firms’ labour and capital productivity rise to prevent a collapse in corporate profitability?
2008 presents a tougher market for firms selling into the UK market as GDP growth slows to 2.2% from 3.0% in 2007. Firms in the financial services industry may face the greatest challenges. Key questions are: Will UK firms’ labour and capital productivity rise to prevent a collapse in corporate profitability? Will UK firms sell more to Europe on the back of the 79p euro? Will UK firms be able to increase export share to emerging markets, which are growing at an average rate of 7% pa this year? So will sectors with a high share of sales abroad relative to the UK fare better than those dependent on sales to the UK market in 2008?
- Most of 2007 saw good performance of the non-financial corporate sector. Official data available up to Q3 suggest that non-financial corporate sector net rates of return reached record levels and cash reserves continued to accumulate. Manufacturing returned 9.7% on capital employed, services 21.2% and Continental Shelf companies 32.5%. However, it is likely that company performance may have weakened in Q4, not least because of heavy price discounting in the retail sector and price falls in residential housing and commercial property.
By contrast, financial companies such as investment banks that took large risks in ABS markets and retail banks with high dependence on wholesale funding, for instance, Northern Rock, took the brunt of the pain from credit market tightening with adverse impact on financial performance in H2
Theme: Highly leveraged sectors such as real estate are already experiencing declining investor interest. Our evaluation of corporate sector leverage will help inform which sectors may face difficulty and which will continue to grow during the year.
- 2008 may bring a growing disparity in the cost of borrowing between cash-rich and ‘branded’ companies on the one hand and sub-investment grade and/or highly leveraged companies on the other. Companies heavily dependent on debt-funded growth may struggle to obtain traditional facilities at rates that they can afford or wish to pay. The challenge facing these firms is to base strategy on a full assessment of markets and economic fundamentals, considering various scenarios. The challenge facing financial services companies is to target firms ‘most likely to get it right’, while at the same time minimising losses on companies/sectors heading towards default and to help with financial planning and initiate ‘turnaround’, where possible.