Experts react as UK holds international investment summit

The UK government today (14 October) hosts a high-profile International Investment Summit, gathering up to 300 industry leaders, in a bid to “catalyse investment in the UK”.

Amid the controversy over P&O Ferries, reports say its owner will attend UK investment summit despite scathing criticism from transport secretary Louise Haigh.

Dr Bruce Morley, an expert in macroeconomics and finance at the University of Bath explained the potential implications for the UK economy: "The Investment Summit is likely focused on how to boost long-term investment in the UK economy, which is essential for raising productivity and driving sustainable per capita economic growth. However, the true impact of such initiatives won’t be clear until the UK completes a typical business cycle, which spans around six years.

"In the short term, we might see efforts to stimulate aggregate demand through fiscal or monetary expansion. This could become clearer following the upcoming budget, possibly involving increased government borrowing. Business confidence in September was lower than anticipated, suggesting the economy may face some short-term challenges.

"To truly enhance UK productivity, we need significant investment in emerging technologies, like robotics, where the UK currently lags behind its key competitors. But investment requires funding, either from domestic savings or foreign capital inflows—this summit’s primary focus seems to be the latter."

Morley added: "However, research consistently shows a strong correlation between domestic investment and savings. The UK has struggled with low levels of both for the past 30 years, ranking among the lowest in the OECD. What’s really needed are policies that encourage greater domestic savings and investment, particularly through reforms to the corporate tax system—a focus that appears to be lacking at the summit."

Professor Mike Lewis, from the University of Bath’s School of Management, who specialises in operations and supply chains, major projects and the route to achieving Net Zero, said:  "The UK government's plans around accounting rule changes and investment summits presents a welcome and seemingly rational view of accounting for growth but some critical analysis is also needed:

1. Clarity needed on the associated policy goals: The balance between the governments missions - pursuing industrial strategy, addressing regional inequality, decarbonization, etc. – is really key but there will be conflict between these priorities.

2. Unclear Impact on Growth: The potential long-term growth effects of these strategies, especially given historical infrastructure projects, requires scepticism. While new projects may be critical and promise growth, past experience – and indeed this week’s UK infrastructure commission report – show how hard it is to deliver – even with reorganisation of the central oversight function (IPA becomes National Infrastructure and Service Transformation Authority, etc.)

3. Over-reliance on Borrowing: While the reclassification of capital spending as long-term assets may create options to increase investment capacity, and still keep within (self-imposed) rules - there are risks with high borrowing, particularly in a volatile interest-rate environment.

4. Foreign Investment Dependency: The assumption that private/overseas investment will fill funding gaps is plausible but there is uncertainty in attracting sustained foreign interest, especially in competitive investment markets. The potential risk of over-relying on external funding sources is under-addressed."

Douglas Grant, Group CEO of Manx Financial Group, said: “While we welcome the news and the shift in mood, the timing of Labour's International Investment Summit raises some concerns. It feels like a classic publicity move, coming just two weeks before Labour's first budget, which is expected to include tax hikes which will take some of the shine off the news. Why bundle all these positive investment deals together in one event, as it feels more contrived than the natural rhythm of investment.

“Furthermore, we cannot overlook the ongoing fiscal uncertainty that has left many SMEs and households hesitant to invest. The commitments from international giants are encouraging but will not offer immediate relief or drive short-term change. Meanwhile, SMEs, which are the backbone of our economy, are still facing significant pressure. Recent research from the Manx Financial Group shows that nearly a third of SMEs have paused or scaled back operations due to financial constraints, and one in ten seeking external finance have been unable to secure it. Although this is an improvement from 2023, challenges remain.

“With the highly anticipated Autumn Statement at the end of the month, UK businesses should seize the opportunity to reevaluate their lending strategies and bolster financial stability in preparation for any potential economic and policy shifts. Higher taxes or inadequate support in the Autumn Statement could further undermine growth, particularly for SMEs, which play a crucial role in job creation and innovation. The new Government must prioritise creating an environment where SMEs can thrive, working with both traditional and alternative lenders to ensure their growth isn't stifled.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown said: ‘’Rachel Reeves is signalling that the UK is open for business and is desperate to lure in more investment to meet growth targets. But while wooing these captains of industry is important, there is an under-used army of retail investors who also need to be recruited.

"If ordinary people invested more in stock markets, they not only have a greater chance to build their financial resilience, but their money will also be channelled into UK assets, helping companies get access to funding to grow. Those people who do invest are already enthusiastic holders of UK equities - 75% of trades on the Hargreaves Lansdown platform take place on the London markets.

"However, the share of households in the UK that directly own stocks and shares has halved in the last two decades (from 23% in 2003 to 11% in 2022). While the Chancellor has stated her aim is to revitalise the London markets, the risk is that if capital gains tax is targeted in the upcoming budget, it’s likely to have the opposite effect. Taxing shareholders more on gains made outside tax-wrapper is hardly likely to incentivise stock market participation."

Streeter continued: "Withdrawing sums from pension funds, in fear of upcoming changes which might the amount of lump sum which can be taken out tax-free from a pension, could also have unintended consequences on UK-listed assets. Although only 4.4% of UK pension funds’ assets are held in domestic funds and shares, it would still mean a chunk of holdings being removed from equity markets.

"An Opinium survey for HL showed that 35% of those intending to withdraw tax-free cash from their pensions were planning to put into savings. Only 12% had earmarked this money for a stocks and shares ISA, with more people (13%) planning to splash it on a holiday."

She further said: "While the Chancellor’s desire to plug spending deficits is understandable, and emphasis is being put on building the UK’s infrastructure to boost long-term economic growth, this should not be at the expense of ignoring the financial firepower retail investors could provide.

"As well as thinking very carefully about the implications of changing the rate of CGT, tax-free allowances should be raised as they are at their lowest level since 1982. It’s also vital that limits on tax free wrappers, like Stocks and Shares ISAs, are maintained to keep retail investors enthused about investing, and ensure funding is available for growing UK businesses. Reducing stamp duty on UK share transactions should also be considered, to stop investment in British-based companies being taxed more heavily than overseas firms."

Streeter added; "While the National Wealth Fund has lofty ambitions to attract inward investment from the big beasts of global finance, opportunities need to be created for armies of smaller retail investors, who together would be a significant force for good in helping boost growth. Opportunities to invest in growth companies are few and far between with retail investors left out of most the stock market flotations, so providing them an ‘in’ to the global wealth fund would be a hugely welcome move.’’