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Are we living in ‘interesting times’?

9 June 2017

The EU referendum, the Trump administration, Article 50, a general election - the last (nearly) 12 months have been eventful in political and economic terms, both globally and domestically. There will, no doubt, be more to come, up to and beyond 2019, when Brexit becomes a reality. Should we, however, heed the adage and worry about living in ‘interesting times’?

The expected victory by the Conservative Party, albeit with an unexpected loss of majority, in yesterday’s general election has seen the FTSE 100 open at 7449, rising to 7538 before falling back to 7484 within 90 minutes. It is investor sentiment that drives the performance of the various indices, and the spectre of uncertainty is one of the most important underlying factors, so what does this movement tell us? Initially, at least, perhaps not very much – the response has been as one might expect. Furthermore, ‘blips’ tell us little - it is long-term trends that matter, and investors who focus on politics can be distracted from the far more important fundamentals that underpin long-term performance.

James Andrews, Head of Investment Management, said:  “Once again, Britain returns to political uncertainty, and it looks like Brexit 2.0 as the Pound falls and the FTSE 100 opens up over 30 points, led by the big multinational overseas earners. Meanwhile, the UK-focused banks are falling, Lloyds down over 3 per cent at the time of writing, and the more domestically-focused FTSE 250 is also down over 80 points at the open. If we continue to see this downward momentum in the Pound for the rest of the day then we may well see the FTSE 100 close at a new record high. “

Given this, perhaps we should not worry too much yet about what is to come – after all, we have been here, or somewhere similar, before and not so long ago. I am, of course, referring to the EU referendum of slightly less than one year ago. Then, as more recently in the run-up to the election, there were pre-result predictions from both camps, doomsayers versus optimists, both sides arguing why their vision was the one that would ultimately come to pass. For example, David Cameron, George Osborne and Theresa May all predicted a near-immediate economic crisis if the vote was to leave, with house prices falling, unemployment rising and the UK economy brought to its knees.

As it happened, the Pound did fall in the immediate aftermath – as much as 13 per cent on the day after the referendum, due to investors anticipating a difficult time to come for the UK economy.

The optimists, however, who saw opportunities galore, were seemingly more on target, at least up to a few days ago. The return to certainty, if only in the short term, had the effect it usually does. Since the UK voted to leave the EU, the FTSE 100 and 250 have been on an upward trajectory, with all-time highs reached by both indices since the referendum. Looking at a five-year period we can see that, in terms of these indexes at least, things have never been so good, with similar progress made. The FTSE 100, whose constituents generate about 70 per cent of their revenues overseas, rose to record highs due to weakness in the Pound since the Brexit vote, which had the effect of making UK companies appear good value. The FTSE 250, regarded as a more accurate barometer for the fortunes of ‘UK plc’ as its constituents are more contained within the EU, performed in a similar fashion.

However, recent figures suggest that this rosy picture may not continue. The aforementioned rise in prices due to Sterling weakness has made imports to the UK more expensive. This, coupled with higher oil prices, has led to inflation being at its highest level in more than three years. This trajectory has not been matched, thus far, by wage growth, so workers are, in real terms, worse off. This translates into less money spent on the high street, on holidays, renovations, clothing, food and all the other crucially important areas vital to UK-focused businesses - if consumers don’t spend on the little things, businesses have no cash flow. This may well have been a pre-election blip itself – uncertainty does tend to introduce hesitation or delay in spending decisions and the continuation of this uncertainty will no doubt play out over the coming months. The alternative, however, is that the good times were only ever temporary. Last week saw Britain sitting at the bottom of the table for GDP growth rate of advanced economies, the worst performer (along with Italy) among the G7 in 2017 so far, with high inflation being the cause and the weak Pound the underlying culprit. As the root of this weakness can be traced back to the EU referendum, falling, as it did, some 13 per cent almost immediately and still down some 12 per cent against the close on the day before the referendum, are we perhaps only now seeing the effect of this momentous decision beginning to bite?

We don’t yet know who will govern, or what they will be able to achieve. It is arguable that the two years that are to come are far more important than the year that has (almost) passed. The Conservative Party’s loss of majority will have repercussions for the leadership, the formation of the Cabinet and, therefore, the tone of Brexit negotiations.

In the words of James Andrews: “A messy Brexit has seemingly just got messier.”

 

Author: Colin Pierce

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