I have just returned from two weeks away on a Greek Island. Although we had Wi-Fi, I had decided before we left that I wouldn’t check emails nor would I engage with the news. The last time I did this was in 2011; I remember getting on the ferry back from France and reading that the stock market had crashed and there were riots on the streets. Luckily this time it was not so bad; stock market was up, the pound had crashed, and Boris was Prime Minister. Well, one out of three is not bad!!!
There are 2-3 things weighing heavily on markets and I have no crystal ball as to what might happen, but we thought it was just worth exploring the different thoughts.
The UK and Brexit
The UK could easily drop into recession; data shows that if we have one more negative quarter then that is technically where we will be. Whatever our views on Brexit, the one thing that is certain is that uncertainty is damaging the economy.
The deadline of 31 October seems to be set. The currency markets appear to be pricing in a no deal scenario. Ironically, sterling could effectively become the euro in all but name, if it falls further to a 1:1 trade. The fall in currency is not a bad thing for investors where there is global exposure as we saw in 2016.
If a no-deal scenario happens then not only will sterling likely fall further than it has already, but we could see an impact in other areas. The UK housing market is at a standstill; with no movement. No-one wants to commit to purchasing a property when there is this much uncertainty. There is the potential with ‘no-deal’ that house values could fall by up to 10%. We don’t know how these figures are arrived at or whether they are true. What we do know is that whilst uncertainty remains there is no clear route through this.
As sterling falls, in theory it should help our exports, but the reality is that Britain’s share of global exports has fallen, and this is significant because it means the economy is struggling. We don’t know the outcome of this yet but there is potential impact on jobs and wages. On the other side what we import becomes more expensive, and where we are likely to see the biggest hit is day-to-day purchases, which adds to inflation as well.
Is there a chance a deal could be struck? Interestingly we have spoken to a few people who think there could be some changes in the wording as the deadline looms. Battle worn MPs may just approve what was put forward by Team May, albeit with a couple of tweaks. Boris will claim victory and the UK can move forward. In that case, sterling will likely recover but whether it gets to previous highs we shall see.
Strangely, either scenario is positive because as it stands, doing nothing damages the economy. Once we know, we can move forward. If sterling is weak, we are likely to see more overseas investors come into the market because UK shares are cheap. Decisions on interest rates will be more certain and big decisions can be made. It is not all bad, but we just have to get to that line.
The UK and Politics
The two main parties have swung from the middle ground to far right and far left. Looking at our current ‘government’, Boris has a majority of one, he cannot really last much longer without an election. He is riding on a high but that doesn’t translate into victory. Gordon Brown had similar issues and crashed out in the election. One thing that Boris can do is speak well; he is very engaging. It would seem that he will move to calling an election if he can.
The choice of ‘when’ might be out of his hands if a vote of no-confidence happens and this is increasingly likely, this could trigger an election. It does seem that Labour are keen to form a government if a no-confidence vote succeeds. The problem with that is they will be a minority government. Which means they can do nothing.
If an election happens (and the likelihood seems high) then there are few scenarios. It seems unlikely Labour can win outright and therefore they would need the backing of the SNP. If they won outright then what happens? They have very clear views, but they will also be stuck with sorting out Brexit, and its subsequent trade deals. This will consume any government over the next few years. They cannot afford to destroy the economy at a time when it will need rebuilding.
The Tories could win a majority and if the Boris factor matches the opinion polls then this could be on the cards. If this is the case, then it will be full steam ahead to make Britain Great!!!! The danger points to this are the Liberal Democrats and the Brexit Party. Farage doesn’t seem to be able to translate victory in Europe to the UK elections, but they could take votes away from the Conservatives which could give Labour victory. The outside bet is the Liberal Democrats with a new leader, Jo Swinson; they are seeing an upsurge in support and although a long way away from the 40 plus seats they had a few years ago, they could be the kingmakers, though less easy to control this time.
So, although politics in the UK are messy, whoever ends up in control will be so focused on Brexit and trade, that actually very little can be done outside of this.
What should we worry about?
By the end of October, we should know where we stand with Brexit. The main concern in the Global Economy is China and the US. Far from this slowing down and for some compromise being found, the pressure is ramping up. Trump is in election mode and this is clearly a battle ground for him. Despite the impact on US farmers and consumers the blame, will always be with China. This is clearly the new ‘Cold War’. (Although unsurprisingly the tariffs may be eased off on the run up to the election!)
The reality is that many of the trading partners with the US now trade more with China, which is now the powerhouse in the Global Economy, and that isn’t going to change. We have said before that no-one wins a trade war, and this appears to be the case. We also flagged that Trump could end up dragging the world into a global recession which of course he will blame China for.
This we think is more significant and something to watch.
Where now
There will always be something to be fearful about. If you asked me what has happened over the last two weeks, I would not have a clue. But interestingly coming back from being shut away it doesn’t feel anything has really changed. That is the point; we can get so engrossed in what is happening, but in 6 months or 12 months we will have something else to worry about. It is not that we shouldn’t care. It is more that we shouldn’t lose sight of the fact that things come and go. We will survive, and it might be uncomfortable, but if we knew all the answers, we would all be wealthy people!
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.