Between the lines: Uncertainty is surefire winner for 2016

Dougal Bennett, partner at private equity firm Dunedin

Dougal Bennett, partner at private equity firm Dunedin

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One word sums up the outlook for Scotland’s economy during 2016: uncertain. Countervailing positive and negative factors make it tough to call how the investment environment will develop over the course of the year.

On the downside, there are a range of economic headwinds which continue to blow, negatively impacting upon the domestic economy and therefore on investment appetite. This is clearly reflected in the Scottish Government’s decision in December to downgrade its forecast for annualised economic growth in 2015 to less than 2 per cent, on the back of slowing quarterly economic activity.

The slowing global economy has hit manufacturers’ exports, lower commodity demand has affected steel and paper producers, and profitability in the oil and gas sector – and the broader energy industry – has inevitably been damaged by falling oil prices.

READ MORE: Scottish economy now lagging behind rest of UK

More happily, there are some reasons for a modicum of optimism. Low inflation and broadly stable employment has boosted consumer spending, the construction industry has benefited from public sector investment and productivity has improved throughout much of the services sector.

Consumer and business confidence levels appear to be broadly positive but fragile. The difficulties facing the oil and gas market will deter all but the hardiest of investors, at least during the first half of the year, though investment may yet pick up towards the end of 2016.

However, there will be other investment opportunities. For example, support services businesses with technologies that can be scaled rapidly and globally are a current area of interest.

Equally, sellers of businesses should remain in a healthy position for as long as confidence remains intact. In the absence of shocks or setbacks that erode confidence, the high valuations we have seen paid for companies in recent times looks set to persist.

The private equity sector itself will continue to generate demand for such businesses, providing crucial liquidity to retiring company owners and providing capital investment in support of growth and job creation.

There is no shortage of private equity money available for investment in support of growth provided that economic or potentially political headwinds do not become too strong (for example, a drawn out debate regarding the UK’s future with Europe may well have a detrimental effect on real levels of investment).

Businesses seeking debt, meanwhile, should continue to be able to access this type of funding. The lending environment continued to strengthen during 2015, with good quality businesses now finding it much more straightforward to borrow. And the growth of new American-style debt funds has seen the emergence of a new source of loan capital.

Nevertheless, it would be prudent to remain cautious. The potential for further turbulence from the global economy is high, whether from monetary policy tightening in Western markets, or continued volatility in China and other developing countries.

READ MORE: IMF slashes growth forecast on China slowdown

Political factors, as noted, are also a source of concern.

In addition to the uncertainties of May’s Scottish Parliamentary elections, there is a risk that the wider debate over the UK’s continued membership of the European Union will unnerve investors. Equally concerning is the evolving political situation in the Middle East.

These are interesting times, you might say.

But it is too early to decide whether that will prove to be a curse, as the Chinese expression has it.

For now, investors remain broadly positive about Scotland’s prospects in 2016 – but it will not require much bad news for pessimism to prevail.

• Dougal Bennett is a partner of UK mid-market private equity firm Dunedin

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