City A.M.’s journalists take a wide-ranging look at what 2014 has in store for the world of finance and business
Restoring faith means costly overhauls
A CAUTIOUS optimism pervades the British and European banking system at the start of 2014.
The incoming economic recovery is at last improving customers’ creditworthiness, while the hard work running down bad legacy assets and cutting off unprofitable businesses should start to pay off.
Both factors mean the strongest banks have a new chance to expand, though the weaker lenders – particularly in the peripheral Eurozone economies – face another tough year.
And regulation hanging over the sector will still shape their fortunes.
Europe’s asset quality review and stress tests will force some of the less sturdy banks to accelerate their plans, offloading lower quality loans and tightening affordability criteria.
But once that is past, analysts hope investors will at last begin to trust European banks, cutting funding costs and kick-starting growth.
“This exercise has the capacity to establish the credibility of the European Central Bank and to restore faith in European banks,” said KPMG’s Bill Michael.
“It could be a wake-up call for the industry, forcing banks to take action to reassess their strategies.”
Other key regulatory interventions include an increase in personal accountability among senior bankers. The goal is to make sure reckless behaviour is punished.
However, analysts at Deloitte fear the threat of a jail sentence could stop the most cautious bankers taking the top jobs – depriving lenders of the level heads they need.
Meanwhile, conduct costs and litigation bills will continue to sweep the sector, and probes into potential market manipulation are increasing.
As a result EY predicts a year of expensive overhauls in banks as they rethink their compliance and oversight procedures, as well as training at all levels of the organisations.
More fizz won’t halt consolidation
DESPITE looming rule changes, growing competition and the gaze of the Public Accounts Committee, accountancy bosses are confident they will pick up plenty of business this year.
KPMG’s UK chairman Simon Collins is looking to recruit staff and size up possible acquisitions. He also aims to start spending money from the firm’s new capital investment fund.
“I see similar growth ambitions across the professional services sector and expect a more fizzy atmosphere among the business community at the World Economic Forum in Davos in a couple of weeks,” he told City A.M.
The hunt for growth in specialisms such as investment funds, cyber security and M&A advice is not a new ambition for the biggest accountants, but it will be given more urgency this year as Europe finally introduces tighter rules on audit competition and how much non-audit work each bookkeeper can do for a client.
Many mid-sized players have already been trying to capitalise on the shift. “The mood music in the market has already started to deliver some change on some audit tenders in the FTSE 100 and 250 and the market is already driving change,” said Scott Barnes, chief executive of Grant Thornton.
More consolidation is on the radar for some of the smaller firms, following BDO and PKF’s merger last year.
For professional services firms of all sizes, the recovering economy is likely to bring work from clients planning to grow – but any rise in interest rates this year could bring indebted firms into the in-trays of the insolvency specialists.
Meanwhile, the political uproar over corporation tax schemes, particularly for international firms, shows no signs of easing. Accountants are likely to be once again caught in the crossfire.
Refinancings and IPOs to continue
LAST year saw the highest level of private equity refinancings since 2007, with €43bn (£35.6bn) worth of company recaps across Europe, according to the Centre for Management Buyout Research.
Now analysts at Standard & Poor’s say that could have been the crest of the recap wave, with most firms that wanted to refinance having done so. An increase in the number of mid-market buyout houses seeking refinancings is more likely, which could boost volumes but lower overall values.
In contrast, private equity exits are set for a busier year. Last year’s spate of initial public offerings will continue – the £3bn float of insurer Saga by Charterhouse, Permira and CVC is on course to be this year’s biggest float – but any uptick in corporate M&A activity could see firms opt for a trade sale rather than a market flotation.
On the acquisition side, private equity houses are looking at a wider variety of deal structures to buy companies, with club deals, minority investments and partnerships with corporate sellers likely to feature more heavily.
Finally, on the fundraising side, a number of buyout houses will once again go to tap investors for money for their new funds. The trend to raise smaller funds than those raised in the boom years is likely to continue for the majority of companies, as investors seek smaller but higher yielding funds.
Strikes and restructurings will change sector
THIS morning, criminal barristers across England and Wales will kick off the New Year by doing something they’ve never done before – going on strike. The “mass non-attendance” is to protest planned cuts to legal aid, which were announced last April but look set to stay in the headlines throughout 2014.
In the City, despite a slew of decent results at the half-year stage, managing partners were still warning that the outlook was far from stable, and the trickle of accounts filed over Christmas seems to have confirmed their concerns. Net profits at Clifford Chance fell 16 per cent over 2012-13, while those at smaller commercial firm Berwin Leighton Paisner slumped by 32 per cent.
The varying fortunes back up a warning from PwC that the gap between the UK’s top and mid-tier firms is set to widen as consolidation sweeps across smaller firms and the so-called Magic Circle continue to outperform. The advisory firm added that unless those medium-sized firms can “radically restructure”, their survival this year and beyond could be in doubt.
All of which could make 2014 the year that alternative business structures – which allow non-lawyers to control firms and external investors to put in cash – really start to take off.
Risks of volatility in the road ahead
THE INSURANCE industry has had a generally positive year. In personal household and property insurance claims and premiums have been falling, despite widespread flooding and a number of large storms. Mohammad Khan, insurance partner at PwC, believes premiums will continue to fall between five and 10 per cent in 2014.
There are some exceptions. Businesses that were affected by bad weather and flooding may face increased policy costs and excesses as they are not covered by the industry-wide Flood Re initiative. Some may not be able to afford to renew, leaving them exposed to further flooding risk and expensive repairs.
The motoring insurance sector is seeing a mixed picture. Overall claims are falling, but the recent capital problems at RSA should serve as a warning for others as bodily injury claims continue to increase.
PwC expects premiums for personal motor insurance to continue to fall in the first part of 2014, largely due to increased competition. It is possible that we could see prices fall again as the industry responds to a Competition Commission report out in December that found insurers are passing on between £150m and £200m in extra costs to drivers.
In the life insurance market there are also positive signs. Prudential released ambitious targets for growth in Asia in December, which look to carry it through 2014 on a high. Chief executive, Tidjane Thiam, said at the time that Prudential can grow and generate cash despite the difficult financial climate.
It is worth taking note of a warning from Standard & Poor’s however, which suggests that overall the market is still suffering with low yields and that bad weather could pose bigger challenges in 2014. It cites tapering in the United States and a review of asset quality at EU banks as further possible causes of volatility. Another one to watch is further clarification of the long-awaited Solvency II directive.
Paying the price for Christmas discounts
CLOTHING retailers suffered a difficult end to the year, as the milder autumn weather and the continued squeeze on consumers’ wallets forced high street names to discount heavily in the run-up to Christmas.
As Marks & Spencer, Debenhams and other retailers release their trading statements, the impact of this discounting on profits is becoming clearer and setting the tone for 2014. Oriel analysts said in their note before Christmas “the prognosis is not good” – although firms like Next have already proved some can buck the trend. But the future is brighter for the electricals sector, which benefited this Christmas from a raft of releases such as the Xbox One the iPad Air, and from the boom in budget tablets.
Analysts predict the retailers in the sector, including Dixons and some homeware companies, will benefit the most from a pick-up in consumer spending this year, as well as a rising housing market and the World Cup.
The outlook for the retail sector this year remains uncertain and while Britons are expected to splash out more, competition for a share of this spending will be fierce.
London leads the upward march
OVERSEAS investor appetite for London property is set to continue unabated this year, helping to drive overall UK investment transactions over the £50bn mark, according Colliers International.
The firm predicts that Chinese investment in particular will triple from £1bn in 2013 to between £3bn-£4bn in 2014, while countries including Taiwan, India and Japan will also make an entrance onto the city’s property scene.
Banks offloading millions of pounds of property loans made before the crisis are also expected to help push up deal volumes, which topped £40bn in 2013.
“The improved economic outlook means investors can now see a greater upside: yield compression and rental growth are pushing up capital values and total returns to the highest level seen in years,” Lambert Smith Hampton’s chief executive Ezra Nahome said.
Meanwhile prime City office rents are expected to climb to £67.50 per square feet, with trophy buildings such as British Land and Oxford Properties’ Leadenhall Building filling up fast amid a lack of other large new spaces.
New franchises to keep on track
IF PATRICK McLoughlin can make it through the year, he will be the longest-serving transport secretary since Alistair Darling eight years ago. McLoughlin, the third minister to hold the post in the coalition, will have notched up a whopping 28 months in the job.
And the government’s flagship transport policies could do with a relatively experienced pair of hands in 2014, with the High Speed 2 Bill chugging its way through parliament and the fight over Britain’s next runway crawling to a conclusion.
Commuters should watch out for the next tranche of franchise contests, which will affect some of the country’s busiest lines. Up to five companies are thought to have submitted bids for the combined Thameslink, Great Northern and Southern contract, with a winner expected to be unveiled in May.
And Londoners will start to see their fellow passengers using contactless bank cards to access the Tube at some point this year – though TfL has delayed the start of the trial, due to the extra workload from a surprisingly small 2.8 per cent average rise in fares announced by the government last month.
A new generation faces regulatory challenges
FOLLOWING a string of high-profile departures from the fund and wealth management industry during 2013, a fresh set of faces will be tackling the year ahead – and the inevitable challenges it will bring.
Last year saw stalwarts Richard Buxton leave Schroders to join Old Mutual, Edward Bonham-Carter step back from controlling Jupiter to become vice chairman, and Neil Woodford – Invesco’s star manager for more than 25 years – announce his departure.
Come April, all eyes will be on Woodford’s next move, as he joins little known private equity firm Oakley Capital, run by serial entrepreneur Peter Dubens.
In the meantime, the old guard’s successors are facing new pressures, with both regulators and retail investors focusing more than ever on fee transparency and investment returns. The scrutiny is likely to favour passive funds, which have lower management fees and tend to offer better long-term returns.
Alongside the industry’s new stars, another set of fund managers are likely to make themselves heard again in 2014 – the activists.
Despite a busy 2013 that saw Carl Icahn take on Dell and Dan Loeb challenge Sony, activist hedgies are still holding huge amounts of cash, with major corporations likely to be steeling themselves for unwanted attention.
Google Glass looks for a killer app
TABLETS saw huge growth in 2013 with Samsung, Apple and Amazon leading a category that grew 50 per cent to 184m units worldwide, according to Gartner research.
In 2014 the tablet market is expected to grow a further 40 per cent to 263m units, with growth led by an influx of cheap white-label tablets from Chinese manufacturers – behind devices such as Argos’ MyTablet – as well as retailer’s own-brand tablets like Tesco’s Hudl.
Traditional PC manufacturers such as Dell, HP and Acer will be hit hardest by this growth. The laptop and desktop market is expected to shrink seven per cent in 2014 to around 281m units globally.
“We see this more as a discussion of delivering the right experience versus just being about the device or ‘decline of the PC industry.’” Dell’s EMEA executive director of marketing Margaret Franco told City A.M. in response to the changes.
Wearable devices will gain attention in 2014, with the launch of Google’s Glass and growing popularity of wearable health and fitness trackers, though the number of units shipped in this category is expected to remain small.
Deloitte predicts smart glasses, fitness bands and watches will account for only 10m units shipped in 2014, and a market value of $3bn.
“Smart glasses should generate the most revenue, from sales of about 4m units... Wearable computing represents a tantalising and lucrative market, which is presently characterised by a degree of uncertainty,” said Deloitte in its 2014 predictions for the technology, media and telecoms markets.
ENERGY & INDUSTRIALS
Price pressure will stay high
SHALE gas had a high-profile year in 2013 and this looks set to continue, with the latest round of licensing for companies that wish to explore for shale gas – typically by fracking – set to be announced in early 2014.
Meanwhile, the government’s increased backing for offshore wind and reduced support for onshore wind and solar energy will alter the UK’s renewable energy mix. “The signs for 2014 are very positive with a number of large scale [offshore wind] projects already progressing through the consenting process,” said law firm Pinsent Masons.
But energy suppliers will continue to feel the pressure from the debate about the price of living ahead of the general election in May 2015, when firms’ margins could be hit if Labour leader Ed Miliband comes into power and fulfils his pledge to freeze energy bills until 2017.
On a global level, demand for gas is expected to jump, due to lower European production and increased appetite in Asia, according to Deutsche Bank.
The beleaguered mining sector is not expected to pick up this year, with commodities prices likely to remain low as China’s growth slows further. But with most of the major firms hiring new chief executives in 2013 and embarking on cost-cutting exercises, we may see further divestment of non-core assets. Opportunistic M&A may also be on the cards for those as brave as erstwhile Xstrata boss Mick Davis.