The importance of investment and investment valuation
Every business knows the importance of investment as this provides a structure and a starting point for planning, income stream forecasting, managing risk, growing their businesses, eliminating rivals and so on. Thus, investment is and will always be the platform for success. During the Brexit period or any period of uncertainty, what naturally happens is that businesses adopt the typical ‘wait and see’ policy - this being their default behavioural characteristic. The important point to note is that Brexit will happen, and businesses will still be around to trade. What needs to happen is that businesses must make a success of this, regardless of whatever comes out of the negotiation process. Therefore, whether we are in or out of the customs union; whether we are subject to changes to the regulatory landscape be they favourable, unfavourable or unchanged; whether we are subject to restricted movements or continued freedom within the EU, businesses still need to trade and must be able to value their investments and their investment potential in what we certainly know will be a changed trading environment. One thing is for sure, the EU will not simply let UK businesses trade as they did before, and although it may be challenging initially, the UK will make a success of Brexit, but firstly, they must calculate the value of their investment potential and opportunities available to them.
In economic terms, the value of an investment is dependent on various functions. The more important ones as far as Brexit is concerned are for example: (i) The structural shocks which impede the investment potential such as the long term depreciation of the exchange rate and its impact on inflation both at home and abroad. In the Brexit landscape, this is essential if profit margins are to be maintained; (ii) the efficiency of capital and its expected rate of return. Capital flows from now on will change and thus alter the decisions firms must make; (iii) the uncertainty around Brexit. Measuring this, a new phenomenon using statistical analysis to do this tends to mitigate the uncertainty in an economy, and calculate supply and demand outlook which assists firms in their decision making. This is a very important measurement in assessing the future both at home and abroad and; (iv) the sources of investment be they public or private. As the changes are effected, the sources and channels which find their way into businesses’ funding circles will change.
Clarity from the negotiating tables has not been forthcoming, and it may be that we are in the early stages, businesses are anxious to know where the ‘tide’ is heading. The functions of investment potential can be measured from what is, and will be a complex set of new Brexit parameters. If businesses are able to measure the value of their investment potential under varying scenarios of Brexit, they will be able to establish new avenues not previously known to them, and by unravelling the complexities of Brexit and understanding the new landscape, can trade freely (in metaphoric terms) and enjoy the potential and opportunities. This should be seen as a chance to revive a flagging manufacturing sector, for example, and improve our declining productivity levels. Brexit will carry on far beyond the negotiations, and as it happens, UK businesses will need to adapt speedily with investment valuation and potential opportunities being at the top of the agenda.
Dr. Victor Chukwuemeka
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