Can small businesses save the UK economy?
The UK is suffering from a collapse in productivity that is leaving economists and the government scratching their heads. James Rae, Investment Manager at Charlotte Square, comments on how small business innovation and investments could save the British economy.
This is a worldwide conundrum, but the UK is being dramatically outstripped by peers such as the US, Germany and France. The potential reasons for this are complex but we feel that one of the main reasons is the lack of investment in innovation.
Corporate giants are not helping productivity
Interest rates on sovereign debt are generally regarded as “risk-free” and are therefore indicators of where yields on the rest of the credit market should sit. Central banks, through quantitative easing, have long since cornered this market and forced sovereign debt yields to incredible lows. In the Bank of England’s latest round of Quantitative Easing it has promised to start purchasing corporate bonds much like the European Central Bank.
All of this makes it far too easy for large corporates to issue debt at extremely low yields and use this capital to buy back shares. This increases earnings per share and ultimately the share price. This open goal is taken repeatedly, by management teams, because of a heavy link between executive pay and the company’s share price. However, this isn’t necessarily the best route for large corporations’ long-term growth prospects.
This all comes at the cost of productivity-enhancing investment, which is a riskier route to take in an uncertain, post financial-crisis world. With the world economy struggling to grow, it is difficult to see how larger companies intend to organically grow their revenues with their limited capital expenditure. In turn, this is contributing to the lag in productivity figures.
Could the AIM market and small companies save the day?
In contrast, many AIM (Alternative Investment Market) listed companies are exploring ways to be more effective than their larger peers. This is often because they are aiming to disrupt markets and grab market share. They are coming from a lower base, than giant corporates, and there is a lot of blue sky for them to aim at.
AIM companies are often led by entrepreneurs who have a substantial shareholding. These business leaders are looking for long-term company growth and are therefore willing to invest to ensure the company moves into a more competitive position. Smaller companies are also more manoeuvrable, due to their size, and can make changes with less bureaucracy.
In addition, AIM is home to a large number of cash generative companies that have innovative technologies which are naturally going to improve efficiencies for other corporations. Examples include robot process automation, new telecommunications solutions and much more.
Research has shown that “diseconomies of scale” (where productivity within a business starts to drop when a firm’s size or output gets too big) does exist and this is one of the major advantages for small to medium size companies. Again, this helps to drive productivity and therefore the UK economy.
How can you benefit?
The government supports AIM because of the potential boost to productivity and job creation. Many AIM stocks qualify for business property relief (BPR) meaning that an AIM portfolio can achieve exemption from inheritance tax when held for just two years and at time of death. In addition, AIM shares can be held in an ISA and, unlike their fully listed peers, are free from stamp duty.
Find out more information on our AIM service and see historical performance figures
About James Rae and Charlotte Square
James Rae is an Investment Manager at ‘Charlotte Square’, an investment management boutique situated in the heart of Scotland’s financial centre and offering a highly personalised discretionary investment management service for a range of private clients, trusts, pension schemes, corporate funds and charities. He is a member of the CFA Institute and graduated with a BSc Honours in Accounting & Finance from Bath University.
AIM investments are not suitable for all investors and are likely to be higher risk compared to stocks traded on the main market. With investment, your capital is at risk. The price of investments and the income from them can go down as well as up and neither is guaranteed. Nothing contained in this article constitutes investment, legal, tax, regulatory or other advice, nor should be relied upon in making an investment or other decision. The tax benefits described in this article are correct at the time of going to print and these may be subject to change by HMRC. ‘Charlotte Square’ is a trade name of Raymond James Investment Services Ltd (Raymond James) utilised under exclusive licence. Raymond James is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3779657. Registered Office Broadwalk House, 5 Appold Street, London EC2A 2AG.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.