Analysis of UK Financial Markets and Capital Allocation Strategies

This report provides a comprehensive analysis of the UK's financial markets, focusing on capital allocation within both the domestic and international economies. It begins with an overview of the financial market's background, highlighting its significance in the global economy and the range of financial services offered. The report then delves into capital allocation strategies, examining how capital is distributed through various instruments within the domestic market and the international market. The analysis includes an evaluation of the UK's mixed economy, discussing the impact of industrialization and trade policies, such as Brexit, on the financial landscape. The report concludes with recommendations for improving the UK's economic status, addressing challenges related to resource utilization, employment, and regional inequalities. The report also covers the challenges and opportunities presented by industrialization and trade agreements, offering insights into the current state of the UK economy and its future prospects.

INTERNATIONAL- TRADE-
FINANCE

EXECUTIVE SUMMARY
This report presents the mixed economy of UK and the characteristics of its financial
markets. It shows the capital allocation in the domestic as well as international economy in UK
where the various factors like GDP, inflation, exchange rates has impacted the performance of
the businesses that are trading in the economy. Apart from that based on the findings of the
impact of industrialization and the trade policies certain recommendations are being suggested
that can improve the current status of the economy.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Background of the financial markets...........................................................................................1
Capital allocation within domestic economy...............................................................................2
Capital allocation within the international markets.....................................................................4
Evaluation of the UK mixed economy.........................................................................................4
Challenges faced due to the industrialization and the various trade policies..............................5
CONCLUSION................................................................................................................................6
RECOMMENDATIONS.................................................................................................................6
REFERENCES................................................................................................................................9

INTRODUCTION
The international trade and finance are concerned with the various instruments that can
be used in financing the import and export transactions that are undertaken cross-borders. This
capital is further allocated in the domestic and the international economy to improvise its current
status and develop it. The project shall be discussing the type of economy in UK and the
financial markets and their characteristics. Apart from that it shall be highlighting regarding the
capital allocation that is done between the domestic and the international economy such that
growth prospects can be derived. Further the in-depth analysis of the UK mixed economy shall
be undertaken and the simultaneous impacts of industrialization and the various trade policies as
formulated by the business. Lastly some key recommendations are suggested that can improvise
the current state of the UK economy.
MAIN BODY
Background of the financial markets
The financial markets in UK are one of the biggest in the world and the most dynamic
and innovative in nature. It is the centre of the various financial activities due to the high
concentration of the capital and the capable resources within the country and its economy. It
offers the wide range of financial services to the clients based on their risk and return analysis
which attracts the investors from all around the world. As per the statistics of 2019 it can be
ascertained that the financial markets have contributed approximately 6.9% of the total economic
output summing up-to £132 billion (Financial services: contribution to the UK economy, 2021)
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It has highly regulated and administered financial markets that are often profitable for the
clients and also help in the growth and development of the UK economy. There are a wide range
of the financial services that are provided to the domestic as well as the non-domestic clients like
the most significant is the fund management services where the portfolio of the institutions are
managed and optimum returns are generated and provided to the clients.
Apart from that the private wealth management services are one of the crucial forms
deriving the development to the economy (Ibrahim, 2018). This is due to the sound regulatory
framework that is established in UK and also the specialized experts that are employed in the
businesses who provide the professional advisory services to the clients. Managing the funds of
the high net worth individuals account for the maximum growth in respect of the economy.
The banking sector formulates the major proportion of the financial markets of UK and it
is the second largest after USA in terms of the banking deposits and handling the international
banking transactions. It has been successful enough to generate maximum returns on the capital
invested even more than any growth oriented economies of the world. There are some of the
most commonly used investment products like securities, private equity, hedge funds, insurance
policies and derivatives. These are used as the alternatives of investment and the huge capital
resources of the clients are allocated on these instruments to generate return for them. This is
how the financial markets of UK have been contributing to the growth and prosperity of the
economy.
Capital allocation within domestic economy
The capital allocation within the domestic economy of UK can be evaluated to know the
contribution of the different sectors of the economy where the capital resources are majorly
invested. The most significant way to allocate capital is by the way of issuing the money market
and the capital market instruments in the economy and float the valuable capital reserves such
that it can contribute to the development in the economy (Yakubu and et.al., 2018). The various
regulated financial intermediaries that are operating within the financial market of the country
are responsible to direct the funds from the place where they are excess to the place where the
funds are required. It directs the flow of funds from the savers to the investors of the economy so
that it can be productively be utilized to generate growth for the company.
The primary allocation activity is done by the local government and the corporations
through issuing long term bonds, notes and the other securities. These financial market
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instruments are used by the government in the financing of the various capital projects that are
undertaken for the developmental purposes like the construction contracts and apart from that
they are used in the financing the national debt of the economy. The corporate bodies also in the
similar manner issues the debt and equity securities to execute the growth and expansion projects
and capitalize over the target markets.
There are several modes used for the purpose of allocating the capital like the bonds,
capital and the money market instruments, securities in the regulatory framework of the financial
markets within the economy. Majorly these markets are affected with the monetary policy that is
formulated by the central bank of the country. The Bank of England shall be deciding upon the
interest rates that are to be paid on the borrowings. These interest rates are based on the current
state of the economy, if there are excess funds floating which needs to be sucked from the money
supply then the interest rates are increased to demotivate the borrowings. On the contrary if the
money supply in the economy is to be increased in the situation of a depressed economy then the
interest rates shall be simultaneously increased (Capital Issuance - January 2021, 2021).
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The capital market consists of the securities which are for the long term investment where
the maturity period lasts more than 1 year. These alternatives contribute maximum to the growth
prospects of the economy and its determinants. There are certain money market instruments like
the commercial bills, papers, promissory notes etc. that are used for the short term investments
related to the working capital requirements. They have the maturity period less than 1 year in the
company.
Capital allocation within the international markets
The capital allocation within the international markets are done for the diversification of
the portfolio and assume the benefit of the opportunities that are present cross-border. These
assets may be classified as the riskier ones, but they shall surely be providing higher returns for
the company. The major source of allocating the capital in the international markets is by way of
foreign direct investment in the profitable ventures that are undertaken abroad (Sare, 2021). One
of most famously used form of the foreign direct investment is in the way of strategic alliances
like joint ventures, consolidations, acquisitions and the mergers. The businesses in the domestic
country acquires that of the foreign country in order to derive the benefit of synergy.
The major impacting factors that are determining the allocations of the capital resources
in the international markets are the exchange rate fluctuations that take place and make a
particular investment profitable. The currency swap contracts that are undertaken in the different
currencies for streaming the future contracts is one of the forms to conduct the allocation of the
capital internationally (Ahn, 2020). This shall facilitate the process of the currency hedge in
transacting between the various currencies. Other international money market, capital market,
bond market and foreign exchange instruments are used by UK to make the investments in the
foreign market.
Evaluation of the UK mixed economy
Mixed economy is followed in UK which is a mixture of both the capitalist and the
socialist economy. There are both the private and the public undertakings in the country who are
working to drive growth and prosperity of the economy. It is one of the most globalized
economy in the world, in terms of the GDP it is fifth in the world and in terms of the purchasing
power parity they stand at the ninth position (Ding and et.la., 2019). The economy has been the
major contributor to the financial services sector and the allocation of the capital to the domestic
as well as the foreign economy.
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Evaluation of the current state of the economy shall be showing that the UK economy is
suffering the problem of stagnant growth rate together with the lowering down of the real wage
rates. Post the implementation of the Brexit policy it can be analysed that the employment levels
have fallen simultaneously reducing the levels productivity and the operational efficiency that is
generated per employee in the company.
The overall economy needs development in terms of infrastructure, transportation,
housing, education and the medical facilities. Regional inequalities is also influencing the growth
prospects of the economy. Also, it can be analysed that the economy is facing cost push inflation
thereby reducing the disposable income and reducing the overall standards of living.
In the mixed economy of UK majorly it is globalized where the free trade and market
forces are followed. But is called mixed because it has some amount of government intervention
related to the social aims and the developmental projects that are undertaken in the economy.
Currently the market is allowing the economy to operate freely and make the optimum utilization
of the resources but the government shall be interrupting in the operations when the economy
fails to operate (Niepmann and Schmidt-Eisenlohr, 2017). The economy attracts a lot of foreign
direct investment in the economy and also indulges in doing investments internationally to
assume the benefit of the growth oriented economies.
Challenges faced due to the industrialization and the various trade policies
The economy of UK is been facing challenges due to the industrialization and the various
trade policies that it has established to grow and develop its economy. Certain the industrial
revolution and the various trade agreements have proven to be very beneficial for the growth of
the trade in UK but has simultaneously caused some challenges and obstacles in its growth.
Some major challenges that are posed by the industrialization and the trade agreements that were
framed with the rest of the world are:-
 The most significant challenge is that it has established free trade agreements with the
rest of the world, which are causing the overutilization of the country's resources and the
benefits are extended to different nations (Sare, Aboagye and Mensah, 2019). This is
leading to the over-exploitation of resources of the economy.
 The free trade agreement with the European Union has earlier posed the challenges of
restrictions to the migrants who are coming to the country. They did not require any
permission. It also leads to the outsourcing requirements in the company.
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 The Brexit policy also that the economy has implemented are causing severe impacts on
its economy. The Brexit policy was undertaken with the motive of obtaining freedom and
enjoying greater powers in relation to its economy. But on the contrary the economy is
facing the challenges as to the established trade agreements, loss of employments,
imposition of the duties and taxes which has overall depressed its economy.
 The economy is named as the mixed economy but the majority of power lies with the
private bodies. They are left to operate freely in the market and as per the market forces
in the economy and the demand and governs its prices. But this has caused inefficiencies
in the economy because of the reason that the government intervention is very less. The
government intervenes only when the market fails to operate on its own, but till this it is
already too late to revive the economy (Holzman, 2019).
 The excessive industrialization has sought to develop the regional inequalities in the
nation related to the wages, job opportunities, development etc. which has again forced
the labourers to migrate to the regions that have better infrastructural and the work
conditions.
CONCLUSION
It can be summarized from the above project that the financial markets and the financial
services that are undertaken in UK are the major contributors to the growth and development.
The financial sector is strong due to huge resources of capital and the expertise in the
investments which are done by it employees. UK follows the mixed economy where both the
public and private sectors are operating and this is done through free market forces in the
economy determining the market demand and supply and the optimization of the resources. It
also shows the various instruments that are utilized in the allocation of the capital in the domestic
as well as the foreign economy. The current state of the UK economy shows that it is highly
stagnant due to the Brexit policy and the breakdown of the pandemic. This situation can be
improved by allocating certain funds to the development of the economy in terms of the
infrastructure, education and health.
RECOMMENDATIONS
Post the implementation of the Brexit policy in the country, the growth opportunities are
sinking and the pound of the country is weakening. This as a consequence has lead to an
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alarming need to improvise and take certain measures to make sure that the UK economy shall
become efficient and generate growth opportunities. These are some recommendations that can
improve the current state of the economy:-
 The standards of living need to be improved in the country by providing affordable
housing at the cheaper rates. This shall take place by building more and more houses
cutting down the inflated housing sector prices.
 Regional inequalities is one of the most significant factors that is holding back the growth
and development of the country. For this the government needs to make investments in
the capital projects related to the infrastructural development, transportation which can
build connectivity and people do not migrate among these regional localities because of
the persisting differentiation (Hwang and Im, 2017).
 An improvement in the health and the education system of the country should be done to
uplift the living standards of the citizens. This shall be contributing to the overall
development of the economy.
 The national debt in the economy is very high as compared to the international standards
of maintaining the debts. Currently the debt is approximately up-to 87% of the gross
domestic product of the country.
 Increasing the levels of employment and the productivity per worker is the major
requirement for the economy to boost the operational level of efficiency. The weakening
of pound has certainly caused one benefit which is that the demand for the UK products
have increased round the world. So to meet these demands the country has to conduct
effective operations.
 The recommendation that must be put to action instantly is that it should consider
spending more in the sector of research and development so that its dependency over the
other countries reduces and can generate its productivity independently. The country also
acquires tech support from the other country which can be avoided if the government
increases the budget for the purpose of researching.
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This graph shows that how the economy of UK is has huge debt burden on its shoulder. This is
posing inefficiencies in the economy and effecting its growth and development.
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REFERENCES
Books and Journals
Ibrahim, M. H., 2018. Trade–finance complementarity and carbon emission intensity: panel
evidence from middle-income countries. Environment Systems and Decisions. 38(4).
pp.489-500.
Yakubu, A. S. and et.al., 2018. Effect of financial development on international trade in Africa:
Does measure of finance matter?. The Journal of International Trade & Economic
Development. 27(8). pp.917-936.
Sare, Y. A., 2021. Threshold effects of financial sector development on international trade in
Africa. International Journal of Finance & Economics. 26(1). pp.515-541.
Ahn, J., 2020. A theory of domestic and international trade finance. Emerald Publishing
Limited.
Ding, H. and et.la., 2019. The relationship between international trade and capital flow: A
network perspective. Journal of International Money and Finance. 91. pp.1-11.
Niepmann, F. and Schmidt-Eisenlohr, T., 2017. International trade, risk and the role of
banks. Journal of International Economics. 107. pp.111-126.
Sare, Y. A., Aboagye, A. Q. and Mensah, L., 2019. Financial development, sectoral effects, and
international trade in Africa: An application of pooled mean group (PMG) estimation
approach. International Journal of Finance & Economics. 24(1). pp.328-347.
Holzman, F. D., 2019. The Economics of Soviet Bloc Trade and Finance. Routledge.
Hwang, S. and Im, H., 2017. International trade finance and exports: evidence from Korean
Bank-intermediated trade finance instruments. Open Economies Review. 28(2). pp.319-
346.
Online
Financial services: contribution to the UK economy. 2021. [Online] Available through:
<https://commonslibrary.parliament.uk/research-briefings/sn06193/>
Capital Issuance - January 2021. 2021. [Online] Available through:
<https://www.bankofengland.co.uk/statistics/capital-issuance/2021/january-
2021>
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