Whatever the economic impact of Brexit will be, it is creating huge uncertainties with regards future trading conditions and new market opportunities. These characteristics are consistent with what companies face in times of recession, so can you increase investment returns through Brexit by learning from how companies prosper during large recessions?
In order to reap benefits from opportunities in changing economic environments, successful companies need to be prepared to provide new and improved goods and services.
Turbulent economic times often unveil new needs in the marketplace, allowing company leaders a chance to think creatively on ways to solve new problems.
During the Great Depression, Richard Drew introduced the first clear adhesive tape in 1930, as budget conscious consumers found the tape extremely useful to patch up old clothing or to fix small breaks in everyday household items. The tape became known as Scotch Tape and was a precursor to Sellotape, the UK version, launched in 1937.
In the 1970s, General Electric produced the first fluorescent light bulb in the midst of the decade’s oil crisis. Though similar to existing bulbs in light output, the design quickly took off because of consumers’ new interest in saving energy.
If companies can read the market, a recession can actually be a great opportunity to introduce unique products to boost sales. Not only are consumers looking for what the company has to offer, competition has decreased meaning true innovation can get more attention in a less crowded market.
Economic turmoil can favour innovative firms reacting to new market opportunities. Successful companies will provide meaningful solutions to the problems. It doesn’t really matter whether it is a period of economic uncertainty or stable growth; the key is to provide a product that demonstrates you have listened to the market and is responsive to unmet consumer needs.
Many business leaders view periods of economic recession as times to simply stay afloat and wait for a recovery. Whilst tightening budgets, cutting employees and spending conservatively is often the knee jerk response, history has shown us that tough times can actually provide a unique opportunity to find success. Innovative firms can grow faster in a recession, leading us to believe that innovation is the best growth strategy.
Innovation is generally associated with small firms because flexibility and responsiveness are important.
Change creates investment opportunities
The process of how capitalism leads to a constantly changing structure of the economy is known as creative destruction. Old industries and firms, which are no longer profitable, close down enabling the resources (capital and labour) to move into more productive processes.
Recessions can amplify and accelerate this process. Research by McKinsey has shown that during the last recession 40% of leading companies lost significant market position and fell out of the top quartile for their sectors. Creative destruction facilitates an environment with greater dynamism in terms of technological ease of entry and exit, fierce competition as well as a major role played by entrepreneurs.
Start-up activity often surges during economic uncertainty and downturns. Technological innovation also can be seen to rise. The combination of new technologies will often usher in powerful new waves of technological change as the economy begins to recover. New entrepreneurial individuals and enterprises forge new business models and new industries that take advantage of these significant technological shifts.
So market changes and uncertainty created by Brexit could create an economic environment where truly innovative, small companies can thrive. Investing in innovation always requires a three to five year view and as such will look past the significant bumps expected along the way.
Tax Efficient Investments
Major issues for many investors will be how to identify such opportunities as well as the high risk nature of investing in small companies. This is where the Enterprise Investment Scheme (EIS) has become an important tool for investors. The government set up the EIS to encourage wealthy investors to back small companies which might otherwise seem too risky.
EIS helps to offset the risk of investing into smaller companies through generous tax benefits. Investors who invest for a minimum of three years benefit from 30 per cent tax relief as well as exemption from capital gains tax (CGT) and inheritance tax (IHT) which means growth within the EIS is tax-free.
What’s more, for high rate tax payers, the combined EIS tax reliefs can return up to 61.5 per cent of monies invested in unsuccessful companies. Whilst all EIS investments are considered high risk, such downside protection has made them much more appealing to private investors.
EIS can also be useful for IHT planning, as investments in EIS fall outside of your estate after only two years.
CSS Partners has been identifying and offering EIS investments to private investors through our free, non-advisory service since 2001.
So if you are looking for investment that can benefit from Brexit then innovative small companies that also qualify for EIS benefits might be the answer.
CSS Partners has raised over £170m for entrepreneurial companies since 2001. To learn more about how we enable private investors seeking higher capital growth to invest with confidence in smaller companies click HERE.
Investments offered by CSS Partners are not appropriate for all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.