Wait and see – What is the possible impact of a potential recession on investment?

There seems to be an air of resigned acceptance permeating the board rooms when it comes the possibility of a recession. But what sort of recession are we looking at and what will it mean for investment?

Will there actually be a recession?

That is a very good question, isn’t it? I am sure it’s one that has been on the agenda for pretty much every full board meeting for last few months. I think we must accept that the signs are there. The base rate is increasing, inflation is rocketing, the cost of business is rising, the pound is looking pretty weak and the current shenanigans around Downing Street are frankly not helping on the home front. There is a difficult picture overseas as well from tragedies such as the conflict in the Ukraine though to the Federal Reserve also raising its base rate. Couple this with a rather gloomy outlook for reduced UK growth and you would need to be very optimistic indeed to not at least plan for a potential recession.

That said, there is also an element of difference and even a positive note about the kind of recession we may be looking at. Unlike a credit driven recession, if this one comes it will be driven by inflation and factors such as the rising cost of business. If the BoE follows through on its repeated promise to tackle inflation with aggression, then it could be just a matter of waiting for the economy to stabilise and riding out a period of rough water. Rising unemployment is not particularly a factor at the moment, in fact a shortage of workers is a core issue. Add to this the initial post covid upturn in the economy, the fallout from the pandemic the continuing saga of Brexit and you realise this is a situation that is both unique and unpredictable. Some of the big factors in a recessive economy, house prices, major industry sectors such as construction, 3PL and so, on are still looking strong. As a result, if a recession does come, it could be a shorter and less painful than previous ones. All in all, it would be a brave person who was prepared to forecast the economic outlook right now. Preparedness coupled with a ‘wait and see approach’ is probably the current default position.

What about investors?

When it comes to investment in business, a recession is not to be underestimated but the fundamental requirements for investing are not going to change. However, there is still that ‘wait and see approach’ to consider. The bottom line is that with a volatile economic outlook, investors will probably take a much more cautious stance. That may mean they will be leaning away from opportunities that feel ‘risky’ and into investment spaces with perhaps less potential return but more stability. What we can expect as a result of all this at the board level is:

• Businesses will be looking to their CFOs/FDs to have up to date knowledge of the changing economy. There will be a need to watch the playing field in a wider context to try and anticipate how the economy will shift. Investors will want to see the C-suite level being proactive.
• Stability will be a core goal for top management. Riskier projects and initiatives may well be called into question, particularly if they require additional investment where the cost of business is rising.
• The cost of business itself may well be more of a focus for potential investors. With supply chains, transport costs and even utilities becoming a factor in the decision. Investors may want to drill down more than usual and will look for contingency against further price hikes.
• The downturn may hit start-ups hardest as investors start to favour businesses with proven track records. Getting the right team at the top should help mitigate the effect of this and start ups in particular would do well to budget for experienced people at the top level.
• It may well be better to focus on long term, slow burn, but steadier, opportunities when presenting for investment. The runway for a start-up or sub venture in an existing brand, could well have a lot of influence.

At the end of the day, sensible investments that are clearly a good opportunity will still gather interest. There has been money around for high yield, fast turn opportunities, including money from overseas, for many years due to a rapidly expanding economy. Those investors may now not be as readily available and may need far more convincing.

All that said, things are not starting from a position we have ever been in before, so the potential for a recession may vanish and the economy could rally. At the moment though, securing investment may well be about motivating potential stakeholders out of the ‘wait and see’ position with very stronger and safer opportunities.

Whatever happens, there has never been more need to ensure you have the best people in place in your C-Suite team. If a recession does come, then good leaders are not just the key to survival, they are the best way to grow and thrive.