Mirror, mirror, on the wall, who’s the gloomiest of them all?
The government is pretty gloomy. It warns GDP could be as much as 10.7% lower over the next 15 years if the UK leaves the EU without a withdrawal agreement.
It doesn’t top the Bank of England, though. Mark Carney, the Bank’s governor, sees Prime Minister Theresa May’s fear and raises it a couple of notches.
Nicknamed “the high priest of Project Fear”, Carney claims UK GDP could sink 10.5% in just five years if MPs vote down May’s deal with Brussels.
The reason the government and its banker share their concerns about a no-deal Brexit may be more politically than economically motivated.
You see, May has a bit of a problem. The maths suggests the deal her government has negotiated with the EU won’t pass a Commons vote.
Since the deal won’t pass on merit, it’ll have to be pushed through parliament some other way. Fear is the weapon of choice.
This gloom is having an effect on the markets. It’s earned the UK the label “uninvestable”.
For investors unaffected by rabid headlines, this makes the UK highly investable right now.
Investors shun the UK
Investors have a new date circled on their calendars: Tuesday 11 December.
That’s the day the UK parliament has its “meaningful vote” on the EU withdrawal agreement negotiated by the Theresa May administration.
Even though May is canvassing the country to rally support for what she calls “the only deal on the table”, the markets don’t believe it’ll win majority support on the first try.
The markets are hypersensitive to any Brexit related news.
The perceived chaos that would result from a no-deal Brexit and the increased likelihood of this outcome has caused many international investors to shun the UK markets.
The UK currently faces a wide range of possibilities that’s making investors nervous.
If parliament rejects the government’s deal with the EU, there could be a second vote after a renegotiation or a general election or another referendum or a “managed” no-deal Brexit or a “chaotic” no-deal scenario.
“The toxic mixture of extreme uncertainty around Brexit and the risk that a hard left tax-raising Labour party could win a general election has prompted a massive retreat from UK equity funds,” writes the Financial Times.
Every bit of intel fed to the public is causing an outsized reaction in the markets. It’s making the UK stock market more unpredictable because it’s “not amenable to rational economic analysis” as one UBS chief investment officer puts it.
According to some analysts and fund managers, the uncertainty caused by the Brexit finale has rendered the UK “close to uninvestable”.
Investors vote with their wallets. They have pulled over £16bn from UK equity funds since the 2016 EU referendum, says data from EPFR.
Global fund managers rated the UK stock market their least favourite asset class in an October survey from Bank of America Merrill Lynch.
This pessimism is also reflected by the (lack of) movement in the pound, writes the Wall Street Journal:
“The pound, seen as a barometer of sorts on the orderliness of Brexit talks, hasn’t rallied with any gusto in recent weeks despite a succession of announcements that a draft deal was imminent. It remains at historically weak levels.”
Perhaps the market has merely learned from the past. Rather than hope for the best and getting caught out (like in June ’16), it’s now preparing for the worst.
Whatever the reason, it seems many investors are most comfortable waiting things out on the sidelines.
It’s not wholly unwise to get out (or stay out) of the market if you’re not comfortable investing.
But, said British nobleman Baron Rothschild, “the time to buy is when there’s blood in the streets”. The worse things seem, the better the opportunities are for profit.
Plus, it’s worth pointing out that all the negativity about the UK markets is overdone. Parliament approving the withdrawal agreement either next month or in Q1 2019 is still by far the likeliest outcome.
Given that the UK is unlikely to leave the EU empty-handed, all the investment that’s put on hold could be put to good use once the Brexit hurdles are cleared.
Says Pantheon Economics:
“Businesses likely will spend some of the cash they have hoarded due to fears of a no-deal Brexit, while a recovery in sterling will boost consumers’ real incomes.”
So, too, expects Strategic Intelligence investment director David Stevenson:
“Corporate Britain is poised for a post-Brexit capex splurge. That looks promising for a more balanced economy in the future assuming an orderly Brexit gets sorted.”
What’s more, the pound hasn’t rallied much since May finally secured her withdrawal agreement and the market universally expects parliament to throw out that agreement in December.
This implies that a negative outcome (deal rejected) is already priced in while a positive outcome (deal approved) could spark a big relief rally.
With the pound undervalued and trading at historically weak levels, it just needs a catalyst to shoot higher. Natwest believes the pound could rise from its current level of $1.28 to $1.43 if May gets her deal approved.
Even a weak pound could boost the UK stock market as the FTSE 100 is packed with multinationals that earn at least part of their revenue abroad (which increases their earnings in pounds).
If you can tune out the frenzy headlines that are screaming for attention, you might also like to know that the dividend yield on the FTSE All-Share Index has rarely been higher in the past 25 years.
Indeed, the biggest thing threatening the UK markets right now might not be Brexit but a global growth slump.
In the end it’s all a matter of perspective, of course. Highly cautious investors might not have the appetite to invest in the UK on the off-chance things go awry.
But for followers of contrarian investor Baron Rothschild, the UK might actually be a highly investable place at the moment.