FTSE 350: Mixed outlook for business services

With this in mind, the outlook is decidedly mixed. The uncertainty surrounding the UK in light of the Brexit negotiations has made it a tough market for many. This has been clear in 2017 from recruiters such as Hays (HAS) and PageGroup (PAGE), who both reported drops in their net fee income in the region during the year. The financial services sector has proved particularly challenging – an important battleground in Brexit negotiations as one of the UK’s dominant industries fights for maximum access to the European markets. Clarity on this is likely to lead to significant upside for the white-collar recruiters. Early in 2018 recruiter Robert Walters (RWA) reported increasing net fee income in the UK, with activity levels “highest across financial services, commerce finance, legal and technology”. However, management said it would be reading too much into it to say financial services has turned a corner.

Negotiations between the British government and the EU are far from over, but as they move into the more substantive second stage, a clearer picture of the UK’s post-split relationship with the EU is likely to emerge, paving the way for increased business confidence. On the other hand, should negotiations stall or the government fails to secure favourable trade terms, the environment could remain challenging.

Away from the uncertainty dogging the UK, Europe, with the emphasis on France and Germany, has been a dependable performer. The EU emerged undamaged following pivotal state elections in the year, and concerns over the Catalan independence campaign look to have quietened down – at least for now.

However, some of the sector’s constituents could benefit from an overhaul in trade terms. Equiniti’s (EQN) technology platforms, designed to help companies deal with regulatory requirements, look well placed to benefit as the UK unmoors from the EU and potentially overhauls parts of its legislation. Similarly, the introduction of the General Data Protection Regulation opens considerable opportunities for information services giant Experian (EXPN), with analysts at Shore Capital recently upgrading the company on that basis.

The United States has been a broadly positive place to do business in the past year, with the Dow Jones Industrial Average soaring to break 25000 and hire companies such as Ashtead (AHT) benefiting from efforts to rebuild after numerous powerful hurricanes in the year. In addition, the recently passed tax reform bill is believed to be positive for US equities. However, analysis from Hassium Asset Management indicates corporate leverage is nearing peak levels, and the risks to the Trump presidency from Robert Mueller’s investigation into the campaign’s ties to the Russian government remain acute.

Developments in the payments market are unlikely to slow down. Our recent analysis of the sector indicated increasing numbers of players were entering the market, while financial services and private equity firms were beginning to pay more attention to the space. That’s paved the way for a healthy M&A environment, with Paysafe (PAYS) receiving an offer last year and JPMorgan (US:JPM) making an initial approach for US-listed Vantiv (US:VNTV), although no offer was made. The trends towards cashless payments and the rise of the so-called internet of things are likely to continue driving the demand for companies in the payment space. More widely, pest control specialist Rentokil Initial (RTO) and non-food consumables provider Bunzl (BNZL) are likely to continue their acquisitive strategies, as they look to bulk out their international operations.

The strength of sterling will continue to be an important determinant for the sector’s fortunes this year, especially as many groups make the majority of their revenues overseas. They may continue to benefit if the pound continues to be weak relative to the dollar and the euro. However, should breakthroughs in the Brexit negotiations occur, or – as was recently mooted – Britain joins the Trans Pacific Partnership, the pound could again strengthen, depriving businesses of a currency tailwind even as confidence in the economy improves.