One of the many lessons of the Brexit vote, according to some media commentators, is that confirmation bias is the new normal in global politics.
The rationale is that on either sides of a debate, people stay committed to their beliefs and opinions, hearing only the statistics or facts that support those views. Yet no matter whether you were in the Remain or Leave camp, the positive news stories of the past few weeks should give some confidence for the UK's future: not only are economists pulling back on their warnings of a near-term Brexit-induced collapse in growth, but UK deal-making is having the best start to the a year since 2008.
While the strength of both consumer spending and the global economy can explain the resilience of GDP growth, the ongoing appetite for M&A amid such significant uncertainty seems more surprising. With the UK heading out of the single market, there are potential hurdles to the flow of much-needed skilled talent and an ongoing lack of clarity over financial market regulations. Cahal Dowds, Vice Chairman of Deloitte UK, and the head of our US-UK deal monitor research, argues that such resilience in acquisition appetite should not come as a surprise: interest rates are at all-time lows, there are record levels of cash on company balance sheets and stock market valuations are strong. There's a wall of capital just waiting to be deployed.
Indeed, when we talk to US buyers about the balancing act of taking advantage of strong M&A fundamentals versus the risk of substantial political and marketplace uncertainties, we hear the same message again and again: US companies place great value on the closeness of our two nations:, the similar business culture, the same language, aligned governance processes, and they place great weight behind the clarity and strength of our legal system. More than this, they see the UK as a source of innovation and skills with an environment that encourages entrepreneurship.
It seems, therefore, that in a time of uncertainty, US buyers are turning to those markets and the cultures that they understand and trust. Indeed, our research shows the marked difference in scale of investment across the most active bilateral deal corridors. From the first quarter of 2015 to the final quarter of 2016, North America outbound deals to the UK hit 960 transactions, compared to just 350 and 279 outbound to Germany and France, respectively. This clearly shows that businesses in the US are looking beyond the political uncertainty and worries about mobility of talent, to focus on the long-term benefits of investing in a country they see as the bridge to the rest of Europe and to the globalised world. In their eyes, a great company before Brexit will still be a great company after Brexit. Of course, the cheaper currency definitely helps makes the maths work but, as Cahal points out, corporates aren't making game-changing decisions based on short term currency fluctuations.
Confirmation bias means ignoring any information that detracts from your argument. I can't talk about the US-UK deal corridor without noting 20 per cent fall in UK outbound deals to North America in the second half of 2016. UK businesses have been understandably hesitant to make major investments until they have a better understanding of what Brexit will mean for their organisations. Yet given that we're still in a climate of low economic growth (no matter what the near-term revisions in GDP forecasts are) M&A is now an imperative. It is the one way for UK companies to secure growth and grab market share. Standing still, while prudent in times of change, may mean UK corporates are playing catch up in the years ahead. Theresa May's Brexit speech in Davos has given some early signals of how the government will approach negotiations with her European counterparts, and business look forward to further clarity. Anything that aids recovery in boardroom confidence and risk appetite will play a critical role in reigniting UK outbound investment across the globe, supporting economic growth in the crucial years ahead.
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