Government looks to tackle productivity puzzle

Budget and Government white paper sets out industrial strategy in bid to boost UK productivity.

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail   by Kasim Zafar, 7th December 2017

Each year the Chancellor of the Exchequer makes the Budget Statement and the focus often falls upon the changes to tax legislation that affect both individuals and corporates. However, this Budget also recognised the UK’s productivity problem and included a number of measures directed towards the industrial rejuvenation of the country. We’re not talking about reopening the mines, but recognising that technological advances will transform most industries and that Britain needs to be ‘fit for the future’. How this will be achieved is set out in the Government’s Industrial Strategy White Paper.

The Industrial Strategy

The vision is ambitious: to transform the UK into the world’s most innovative economy, provide good jobs and greater earnings power for its workforce, provide a major upgrade to the UK’s infrastructure, become the best place to start and grow a business and to build prosperous communities.

If you can muster the energy to read through the full 250 pages of it you will uncover some worthy initiatives. I would agree with Phillip Hammond that the key to Britain’s success in a post-Brexit world sits in our innovative industries: technology, advanced engineering and life sciences. Our economic centre of gravity needs to shift from Canary Wharf to the Old Street roundabout.

The Industrial Strategy recognises this and pledges to support its development. Examples of this include:

  • 40% increase in government R&D investment to 2.4% of GDP by 2027 (closing the gap to the current 2.8% in the US and 2.9% in Germany) in addition to £725million of investment in a fund for strategic investments specific to the strategy
  • £406million of investment in maths, digital and technical education to address the shortage of STEM skills (Science, Technology, Engineering and Maths).
  • Creation of a National Retraining Scheme to support and re-skill individuals, ready for the digital era
  • Investment of £400million for electric vehicle charging infrastructure and a £100million extension to the plug-in car grant
  • Commitment to have fully-autonomous cars on UK roads by 2021 and for 25% of central government cars to be ultra-low emission by 2022
  • Investment of over £1billion for digital infrastructure including 5G for faster mobile and connected device communications
  • Commitment to further energy efficiency savings through smart grid technology
  • A variety of industrial sector ‘deals’ where largely the government pledges to ease frictions of doing business and encourage collaboration across industries. In particular, the Industrial Strategy highlights deals with life sciences (healthcare), construction, automotive and artificial intelligence sectors.

The strategy identifies ‘Grand Challenges’ which are set for the UK government and wider economy in response to global forces that are shaping our rapidly changing future and which must be embraced to harness the opportunities they represent. These Grand Challenges commit to:

  1. Put the UK at the forefront of the artificial intelligence (AI) and data revolution
  2. Maximise the advantages for UK industry of the global shift to “clean growth”
  3. Become a world leader in shaping the future of mobility
  4. Harness the power of innovation to help meet the needs of an ageing society

So if we take the strategy at face value, assuming the government will be resolute on its commitment to digitising, upskilling and building a more modern Britain, are our portfolios lined up to benefit?

EQ Best Ideas Portfolios

Within our portfolios, a number of the funds are exposed to UK equities with holdings aligned with the Government’s Industrial Strategy. Here are four examples:

Liontrust Special Situations Fund: Infrastructure

The various infrastructure projects planned by the government will require extensive engineering expertise. Holdings include Renishaw, an advanced engineering company that serves a number of industries across energy, consumer electronics, robotics, medical equipment and automotive parts. Meanwhile, Ricardo plc is a global strategic engineering and environmental consultancy that specialises in the transport, energy and scarce resources sectors.

JO Hambro UK Dynamic Fund: Innovative Healthcare

GlaxoSmithKline and AstraZeneca are both examples of large companies focused on knowledge intensive industries. These businesses are larger and more diversified than the likes of Shire, a biotechnology company leading in the development of drugs to treat rare diseases, which also features in portfolios. Embracing the digitalisation of our economy, EMIS Group is all about connected care, linking up different healthcare sectors through technology making patient information available where and when it is needed.

Rathbone Global Opportunities Fund: AI & Data

We all know Google as the world’s search engine and online advertiser and as an American company. But their business extends way beyond this through numerous subsidiary companies. One of these is the UK-based company Deep Mind, which is arguably the world leader in artificial intelligence research. Its “AlphaGo” system famously beat world champions in the historic game of “Go”.

However, their work in computer science is much broader than getting computers to play games. Their artificial intelligence systems are having a major positive environmental impact by learning how to use vastly less energy in Google’s data centres. Deep Mind is also consulting with the National Grid on how to use AI to improve energy efficiency across the UK. Deep Mind is also collaborating with clinicians in the NHS on delivering better care for conditions that affect millions of people worldwide.

Impax Environmental Markets Fund: Clean Growth

Ensuring the economy develops in a sustainable manner, that we make the best possible use of our resources, consume energy in an efficient manner and that we develop new infrastructure required for the increasingly digitised world ahead all requires careful planning. That applies not only to government policies but also to implementation. It turns out the UK is home to some of the leading environmental consultancy firms.

RPS is an international consultancy providing advice on the development and management of man-made and natural environments, planning and development of strategic infrastructure, exploration and production of energy, water and other resources. Additionally, Spirax-Sarco Engineering plc is a world leading business focused on energy solutions and peristaltic pumps, delivering energy and water savings through process improvements for their clients.

Looking forward

The launch of the Industrial Strategy, in my view, has the potential to be a watershed moment for key parts of the UK economy and could provide further opportunities for the Best Ideas Portfolios. I believe there is still a huge amount of work to be done by the government and industry to invigorate the hinterland beyond our great cities while these initiatives take hold and start creating growth.

Kasim Zafar, Portfolio Manager
EQ Investors

About the author: Kasim Zafar

Kasim graduated with a BSc (Hons) in Physics from Imperial College and is a CFA charter holder, being a regular member of the CFA Institute and CFA UK. He began his career in investments in 2002, gaining experience as a portfolio manager and senior analyst of global capital markets. His experience spans multiple asset classes, constructing portfolios with varying risk/return objectives and active risk management processes.

Kasim is the portfolio manager for the EQ Investors Best Ideas and Absolute Return portfolios. He is an active member of the investment management, strategic asset allocation and fund selection committees.

When not immersed at work, Kasim often finds himself stumped and constantly amazed by his young daughter at home. He also enjoys spending time in the kitchen practising his “cheffy” skills with both European and Asian cuisine, reflecting his mixed background.

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