The political turmoil that characterised 2018 shows no sign of abating, and as we edge towards the end of the current economic cycle there could be more uncertainty ahead. However, there are still opportunities on offer, particularly for tech-enabled, global businesses. Execs need to remain resilient and ready to invest wisely.
Here, Members of the Criticaleye Community give their predictions for the year ahead.
Recession on the Far Horizon
Guy Foster, Head of Research at Brewin Dolphin, foresees the end of the current economic cycle, but there is still time for growth
As we look towards the end of the current economic cycle, the yield curve is close to inverting; the ten-year interest rate is getting near to being below the two-year one. This reflects expectations that interest rates are likely to fall. In the past, this inversion has occurred roughly twelve months before a recession and six-eighteen months before the stock market tops out.
The fact that we’re close to this point is probably acting as a headwind for investors at the moment. However, we’re not there yet, and historically this has meant that there are still some further highs to come. In the US, we expect the economy to enter recession in around early 2020.
The investment cycle always ends when companies have too much capacity and then something shocks demand. Then businesses incrementally cut back, which snowballs, resulting in a recession.
However, in this cycle we haven’t reached that level of over-investment. Because of this, we are anticipating a ‘technical recession’, rather than an extremely deep one like the financial crisis. It could be more like the recession in the early 2000s, which was very modest. It did have a big negative impact on the stock market, but valuations aren’t as high as that at the moment, and so we wouldn’t expect a precipitous decline in growth.
Political Promises Must be Kept
Mary Jo Jacobi, Board Mentor at Criticaleye and a NED at Weir Group, calls out poor political leadership as being the greatest barrier to global growth
The hallmark of late 2018 was disruption: President Trump in the US, Brexit in the UK, riots in France and trade disputes between the US and China. In addition, we’ve seen the arrest of Huawei's [China’s telecom giant] CFO, in Canada; unsettling accusations against the Saudi Crown Prince; a contraction of the Japanese economy; and loss of faith in the tech sector. If political leaders would choose to offer constructive responses to these issues and restore their leadership, I think we could see modest growth despite a volatile environment.
However, in my view, the uncertainty generated by poor political leadership is the biggest barrier to growth. That being said, I think the difficulties of governing are increasing in a world where highly-vocal protestors find new sources of outrage frequently and are empowered by social media to act on every perceived slight.
Elected leaders must find ways to better understand their constituents, or 2019 and 2020 will be even more disrupted than the past twelve months. There is a rising expectation that promises must be kept.
Leadership Skills Growing in Importance
Matthew Blagg, CEO of Criticaleye, says the best business leaders will be able to make a big impact in 2019, but they will need to make brave decisions within a challenging market
I would argue these are great times for leadership. Most top execs want to make a real difference, and you can have more of an impact in a tighter marketplace. It’s true that you’ll have to work twice as hard for half as much though.
It might feel unpleasant, and you may feel that you’re not making a difference, but you will almost certainly be having a greater impact. As things get more difficult that’s where strong, inspiring leadership really shows.
Access to capital is going to be one of the biggest barriers to growth in 2019, because when it gets tight cash-wise businesses have to revise their plans to invest. I think Boards will find it very difficult to back investment when they are concerned about profitability and the knock-on implications on valuations.
To succeed in these challenging times, leaders need to make sure there is alignment across their top team, get the right talent in place and be brave in their decision making.
A Competitive Market for Tech Talent
Martin Balaam, CEO of Pimberly, the SaaS-based systems concern, sees significant opportunities for ecommerce businesses if they can overcome a shortage of talent
The relentless push to online is a real opportunity for many businesses. New-wave companies that are zero bricks and mortar are really pushing the boundaries, and people are increasingly happy to buy large, expensive items – like furniture – online. They are also more willing to transact from their mobiles. So, from our point of view, in the e-comm sphere, a continuing globalisation, where consumers have got freer access to more companies across the world, is exciting.
It can be a challenge to acquire new talent though. The pool of available candidates is getting smaller, and there is a real shortage of developer skills. Coding has been pushed up the agenda in schools, but I think it’s going to be another five or so years before we start seeing the impact of that in the employment market. There’s also a demand for more data analytics skills and things like machine learning and AI.
We are responding by creating a great environment to work in, and obviously you also have to be ‘on the money’ in terms of pay. We’ve also relocated into the centre of Manchester, because it’s an attractive place where the best talent wants to be. This does mean your cost per square foot will increase, because you’re having to go to where you’ll attract the best people.
Targeted, Judicious Investment
Till Vestring, Board Mentor at Criticaleye and a NED at Keppel Corporation and Inchcape, believes business leaders have grown used to the uncertain environment and so will continue to invest, albeit cautiously
I think we will be fine in 2019, as long as there isn’t a major external shock. But stock markets are not going to boom again, and generally everyone is going to be more cautious when it comes to making major investments.
Technology-driven disruption is still at an early stage in the business-to-business world. In 2019, I think we can expect even greater attention on digital and disruption from corporates, and even more venture capital money being poured in to try and disrupt incumbents in the industrial space.
Political uncertainty will have an impact on business confidence and willingness to invest, but I think business leaders have got used to it and are moving ahead. Clearly, if the disputes between the US and China intensify further, there will be negative implications for trade. But that would also lead to new investments to reshape supply chains, which will benefit a number of countries across Asia and perhaps also in Europe.
A Stable Market for Commodities
Viral Gathani, Head of Corporate Finance and Strategy at Vedanta Resources, predicts that the growth led by emerging markets will support positive commodity markets into 2019
I’m fairly optimistic about next year. Currently, we are slightly down on the highs in many commodities that were reached about a year ago. Oil is down to the low $60s per barrel, zinc is down, and copper is down a little bit as well. But, the commodities cycle is always more volatile than the general economic cycle.
I believe this is a temporary trend rather than the start of a major downturn. I think it’s a reaction to how quickly commodities went up in early 2018, and there’s probably a view from the market that they were over-bought.
The fundamentals of the global economy will assert themselves in 2019; there is a lot of growth being led by emerging markets, particularly China and India. Their size is such that the growth will be an important factor in commodity markets globally, and that’s going to continue.
The other change is the shift in oil production from the traditional Middle Eastern sources – like Saudi Arabia – to America. America is growing its production dramatically, using unconventional technology such as fracking. People are focusing on how quickly the US can ramp-up production and how that might change the power dynamic between the US and OPEC.
A Change of Focus for Public Services
Colin Dobell, Managing Director of Mitie Care and Custody, foresees a shift away from a single-minded focus on price when it comes to funding public services
2018 has been something of a watershed year with the demise of Carillion, and a series of other high-profile failures, being followed by a reset of the relationship between outsourcers and the Government.
Since the financial crash, too many procurement decisions have been driven by price and it’s very encouraging to see that quality of service, certainty of delivery and sustainability, are becoming key drivers for outsourcing critical services again.
There’s much to be optimistic about, and in a post-Brexit world, it’s clear Government will require intelligent solutions in sectors such as immigration and healthcare to help deliver the public services we all rely upon.
However, political uncertainty in the UK doesn’t look like it’s going away anytime soon, and the Brexit debate has put a brake on almost all other areas of policy development. This ‘void’ and lack of clear direction are not helpful.
Next week’s Community Update will look at Leadership Capability in High-Growth Businesses.