UK economy facing “capital destruction” event as furlough ends

by | Oct 26, 2020

Share this article

Maven Capital Partners

Major sectors across the UK equity market are facing a “capital destruction” event in the next few months as the real impact of coronavirus feeds through to their bottom lines, Smith & Williamson Investment Management’s Enterprise Fund team has warned.

The furlough scheme has protected a number of businesses, including many in the retail and leisure industries, which have been some of the worst impacted by the coronavirus.

However, as the scheme is wound up, many businesses will not be able to return to trade as normal. Mark Swain, co-manager of the Smith & Williamson Enterprise Fund, said the impact of this was about to be felt across several industries.

 
 

“Markets have held up relatively well in the face of coronavirus, including in the UK, but capital destruction is coming now,” he said.

“We are at the tipping point as the furlough scheme comes to an end, and unfortunately coronavirus is going to create ‘survivor’ companies and remove a lot of weaker ones.”

Swain, who manages the Enterprise fund alongside co-manager Mark Boucher, said various sectors are seeing long-running trends – both positive and negative – being accelerated by the pandemic.

 
 

“Some companies are benefiting from this and will continue to do so and some, particularly those relying on cheap and abundant leverage, no longer have viable business models,” Swain said.

“Pandemics accelerate existing structural trends, and so this time companies with a strong internet presence are thriving, and those relying on high footfall, or those overburdened with too much debt for example, are really struggling.”

Swain said as a result of the nature of the crisis, the sectors in the eye of the storm, including retail and travel and leisure, were polarising, with winners likely to benefit from better business models and healthier balance sheets, but also a decline in competitors.

 
 

“If you look at retail, for example, a lot of capacity is coming out of that market and the better operators – those that are good at retailing and have a strong internet presence – are going to prosper.”

By contrast, the duo expect the “zombie” companies being kept afloat by the furlough scheme to face an uphill struggle for survival.

“If you are a business that is currently not open because of Covid-19 restrictions then the future looks very bleak, and there are large swathes of struggling companies across the UK that will not get through this,” he said.

Share this article

Related articles

IFAM 127 | Not if, but when | April 2024

IFAM 127 | Not if, but when | April 2024

Not if, but when… Spring finally seems to have arrived! Since our last edition, we have had the Spring Budget and the Bank of England (BoE) rate announcement to name but a few important landmarks. This has kept us, like all of you I am sure, quite busy over the last...

Sign up to the IFA Magazine Newsletter

Trending articles

IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast - listen to the latest episode

x