Country Analysis: United Kingdom

By Marlène Aimar

CW1 - LON313 International Investment

Analysis

29th March 2016

TABLE OF CONTENT

Introduction

Opportunities & Market Imperfection (PESTEL Analysis)

Potential Risks

Risk Management

Conclusion

INTRODUCTION: OVERVIEW OF THE COUNTRY

Leading trading power and financial

centre

2nd economy in Europe

Population: 64.088.222

Natural resources: oil, gas and coal

Services accounts for 79% to total GDP

(banking, insurance, business services)

Manufacturing represents 10% of economic output

One of the fastest growing economiesin G8

EU member

Currency: British Pound

In 2008, the global financial crisis hit the economy

High public deficit but intended to beeliminated by 2020

(Trading Economics 2016) (CIA 2016)

OPPORTUNITIES & MARKET

IMPERFECTIONS

POLITICAL

• Strong democratic system

• Political stability

• Permanent membership of the UN

Security Council, Member of the G8

and NATO

• Considerable influence: IMF and World

Bank

• European Union’s member

• Risk of EU exit

(referendum in 2016)

(Export.Gov 2016)

LEGAL

• Common law system

• Low corporation tax: 20%

• Increase of exemptions of social

security contribitions

• High in business Freedom

• No investment barriers and no

restrictions on the transfer of capital

or repatriation of profits

OPPORTUNITIES & MARKET

IMPERFECTIONS

ECONOMICAL

• Six-largest economy in the world

• Ranked as the 6th country with ease of

doing business in

• Favourable investment climate

• The pound strong against the dollar

• Big Mac Index: GBP undervalued against

the dollar by 7.6% of the GDP

• High indebteness: 88.6% of the

GDP

(Export.Gov 2015)(Doing Business 2015)

(Export.Gov 2016)(Trading Economics 2016)

Figure 1 – United Kingdom GDP Annual Growth Rate (Trading

Economics 2016)

• Strong economy growth: 2.5% in 2015

Figure 2 – The Big Mac Index (The Economist 2016)

OPPORTUNITIES & MARKET

IMPERFECTIONS

Technological

• Intellectual Property rights

• Increasing R&D expenditure

• High Developed country

Ecological

• UK’s greenhouse gas emissions

came down by 8.4% in 2014 (The

Guardian 2015)

• 33% of recycled and composted

household waste in 2015 (CIA 2016)

Figure 3 – UK greenhouse gas emissions from

1990 to 2014 (The Guardian 2015)

Socio/Cultural

• English speakers

• Strong eduction system

• Healthcare service

• Urban population : 82,6% of the

total population in 2015 (CIA 2016)

• Challenge of an aging

population : 0.6% of annual

growth (The World Bank 2015)

POTENTIAL RISK

BALANCE OF PAYMENTS UK

2011 2012 2013 2014

Current

account-27,400 -54,698 -77,908 -92,469

Capital

account-380 -167 -472 -415

Trade

Balance-93,542 -106,498 115,231 123,143

Extract from: Office for National Statistics(http://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments)

Last update: December 2015

BALANCE OF PAYMENTS

2011 2012 2013 2014

Imports 401.7 410.8 421.5 419.1

Exports 308.2 304.3 306.2 295.4

Balance -93.5 -106.5 -115.2 -123.7

-200

-100

0

100

200

300

400

500

£ b

illi

on

UK Trade in Goods

CURRENT ACCOUNT

FORECAST

Figure 4 – UK Current account – Forecast 2016-2020 (Trading Economics 2016)

• Current account deficit reached 5.5% of the GDP in 2015

• Forecast by 2020: Around 14.5 billion

(Trading Econimics 2016)

FOREIGN EXCHANGE

RATES

1.3

1.35

1.4

1.45

1.5

1.55

1.6

1.65

1.7

2011 2012 2013 2014 2015 March2016

Exchange rate

GBP/USD

• Deficit is linked to the exchange rate

• Echange rate: Price of a nation’s currency in terms another currency(Business Dictionary n.d)

(CIA 2016)

FOREIGN EXCHANGE RATES

• Slow recovering

against the US dollar

since the begining of

March 2016

Figure 7 – 1 Month Change - Currency Perfomance GBP/USD (Financial Times 2016)

Inflation rate: 0.3%

(low) contribute to the

appreciation in the

value of its currency

Figure 6 – 1 Year Currency Perfomance GBP/EURO (Financial Times

2016)

• Euro has appreciated

against the sterling

FOREIGN EXCHANGE RATES

LINKED TO THE TRADE

BALANCE

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

2011 2012 2013 2014

Exchange rate

Imports

Exports

GB

P/U

SD

Tra

de B

ala

nce

£B

illio

n

Appreciation of

the sterling

worsens the

current account

and the balance of

trade:

UK exports

become more

expensive

UK will import

more since the

import prices

are cheaper

CURRENCY RISK

TRANSACTION EXPOSURE

Exchange rate exposure at the time

we make the transaction

Transaction gain or loss (Receipt in

Sterling)

EURO depreciates

TRANSACTION LOSS

EURO appreciates

TRANSACTION GAIN

TRANSLATION EXPOSURE

Less £

More £

When a company convert the

currency of a foreign branch into the

domestic currency

Transaction gain or loss (Receipt in

Euro)

£€

€

More €

EURO depreciates

TRANSACTION GAIN

Less €

EURO appreciates

TRANSACTION LOSS

Result in an Economic / Operation Exposure Fluctuation in the

exchange rates (everyday risk for international companies)

£

COUNTRY AND

COMMERCIAL RISKS

• Country risk assessment A2

Figure 8 - Country risk map (PWC 2015)

(Coface 2016)• Business Climate A1

COUNTRY RISK COMMERCIAL RISK

• Potential exist from the EU

Renogotiation of all EU free-trade

agreements

Leading to a higher export and import

prices and permanently reduce UK GDP

• High rivalry (developed economy)

CROSS-CULTURAL

RISK

Figure 9 - Countries comparision (The Hofstede Centre)

1. Highly individualist

1. Driven by

competition,

achievement and

success

1. Low power distance

society

1. Low uncertainty

avoidance

1. Indulgent (optimism)

RISKS MANAGEMENT

SPOT AND FORWARD RATE

Spot rate is the today’s price of a currency

Forward rate is a quoted rate applicable at a future date

(Moffet, Stonehill and

Eiteman 2013)

Figures extracted from The Forex Market Website

Help companies to hedge (reduce transaction risks)

Name Bid Ask Net Chg. Chg. %

EUR/GBP Spot 0.7781 0.7790 -0.0030 -0.39%

EUR/GBP 01M Forward 62.60000 63.9000 0.4000 0.64%

EUR/GBP 02M Forward 127.6000 129.7000 -1.3500 -1.04%

EUR/GBP 03M Forward 191.3000 194.0000 -1.4000 -0.72%

EUR/GBP 04M Forward 254.4000 259.1000 -06500 -0.25%

EUR/GBP 05M Forward 321.3000 327.3000 -3.1500 -0.96%

RISKS MANAGEMENT

FORWARD CONTRACT

Hedge currency risk Fixed exchange rate

Spot transaction:1EUR = 0.7781 GBP

GBP Received:£3.8905 million

Transaction Exposure:

Gain

5 months FWD:1EUR = 0.7164 GBP

GBP Received:£3.582 million

EUR Received:EUR 4,999,681.55

EUR Received:EUR 4,999,755.6

million

Translation Exposure: Loss

Translation Exposure: Loss

Transaction Exposure:

Gain

Renault sells cars to a UK customers for EUR 5

million

*Gain of 74 thousand with a 5 months Forward Contract

RISKS MANAGEMENT

OTHER RISKS

Cross-cultural risk:• Using local employees

• Learning the Bristish culture and tradition

Commercial risk:• Observing and studying the strategies of the potential competitors

• Following the trend of the UK regarding the EU and anticipating a

potential exist (settle new strategies by setting forward contracts, for

instance, in order to hedge: exchange rate flucutations)

Country risk:• No major risk, but a need to stay informed of the political situation

CONCLUSION: UNITED KINGDOM

INVESTMENT OPPORTUNITIES

- 6th largest economy in the world

- Fastest growing economy

- Good climate for business

investment

- Forecast : Reduce the current

account deficit by 2020

- Sterling strong against the Euro

and the Dollar

- Hedging: Forward contract

INVESTMENT RISKS

- Twin deficit

- UK exports less than imports

- Decrease of FDI

- Currency risks: Transaction and

translation exposure

- Cross-cultural and commercial

risks

- Potential exit from the EU Fall

of confidence from investors

RECOMMENDATION: Waiting the referendum in June 2016 and

ascertaining a decrease in the current account deficit before investing

THANK YOU VERY MUCH FOR

YOUR ATTENTION, IF YOU

HAVE ANY QUESTIONS,

PLEASE ASK.

REFERENCES

Moffet, Stonehill and Eiteman (2013) Fundamentals of Multinational Finance. 4th edn, Person.

Business Dictionary (n.d) Exchange Rate [online] available from

<http://www.businessdictionary.com/definition/exchange-rate.html> [11 March 2016]

Central Intelligence Angency (2016) The World Factbook [online] available from

<https://www.cia.gov/library/publications/resources/the-world-factbook/geos/uk.html> [10 March

2016]

Coface (2016) United Kingdom [online] available from <http://www.coface.com/fr/Etudes-

economiques-et-risque-pays/Royaume-Uni> [3 March 2016]

Doing Business (2015) Economy Rankings [online] available from

<http://www.doingbusiness.org/rankings> [3 March 2016]

Export.Gov (2015) Doing Business in the UK [online] available from

<http://www.export.gov/unitedkingdom/doingbusinessintheuk/index.asp> [3 March 2016]

Export.Gov (2016) United Kingdom Market Challenges [online] available from

<http://apps.export.gov/article?id=United-Kingdom-Market-Challenges> [3 March 2016]

REFERENCES

Export.Gov (2016) United Kingdom – Market Overview [online] available from

<http://apps.export.gov/article?id=United-Kingdom-Market-Overview> [3 March 2016]

Export.Gov (2016) United Kingdom – Trade Barriers [online] available from

<http://apps.export.gov/article?id=United-Kingdom-Trade-Barriers> [3 March 2016]

Financial Times (2016) Currency Performance [online] available from

<http://markets.ft.com/research/Markets/Currencies> [28 March 2016]

Fxstreet The Forex Market (2016) Forward Rates [online] available from

<http://www.fxstreet.com/rates-charts/forward-rates/?id=eur%2fgbp> [20 March 2016]

Office for National Statistics (2015) Balance of Payments [online] available from

<http://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments> [10 March 2016]

PWC (2015) Country risk premia quarterly update [online] available from

<http://www.pwc.co.uk/services/economics-policy/insights/country-risk-premia-quarterly-

update.html> [14 March 2016]

The Economist (2016) The Big Mac Index [online] available from

<http://www.economist.com/content/big-mac-index> [21 March 2016]

REFERENCES

The Guardian (2015) Large fall in UK greenhouse gas emissions of over 8% last year

<http://www.theguardian.com/environment/2015/mar/26/large-fall-in-uk-greenhouse-gas-emissions-

of-over-8-last-year> [6 March 2016]

The Hofstede Centre (n.d) United Kingdom [online] available from <http://geert-

hofstede.com/united-kingdom.html> [14 March 2016]

Trading Economics (2016) United Kingdom [online] available from

<http://www.tradingeconomics.com/united-kingdom> [13 March 2016]

The World Bank (2015) Population growth [online] available from

<http://data.worldbank.org/indicator/SP.POP.GROW> [3 March 2016]