Brexit: still weighing on the UK market


Martin Cholwill, Senior Fund Manager

5 October 2017

In the UK, we are starting to see the political fallout from the general election result, with the government looking weakened and divided. Theresa May’s authority has been seriously damaged and we are entering a sustained period of political uncertainty, at the same time that EU divorce proceedings need to make tangible progress; this could, in turn, lead to bouts of heightened stock market volatility. I believe that we could well see lots of policy U-turns and kneejerk reactions to external events. Loosening the government purse strings through less stringent control of public spending could well be one consequence, and could help economic growth in the short term. However, it will come at the expense of higher public borrowing and possibly higher taxation over the longer term. This uncertainty makes it easy for companies to defer any major investment decisions in the UK and will put pressure on the government to provide sweeteners to encourage inward investment.

Ultimately, the Brexit terms will be a political, not economic, decision and Merkel’s authority and leadership role within Europe has also been weakened following the German election result. Gaining a European consensus on a Brexit deal will be difficult, as there are many other pressing and important issues for European politicians to address. The longer-term economic impact of Brexit may not be clear for quite a while. Nevertheless, I would not be excessively bearish about the ultimate divorce from Europe at this stage, but I recognise that the status quo that has prevailed for a long time is almost certainly dead in the water and there are a wide range of possible end games.

In the short term, I think we may have passed the worst point for post-referendum sterling weakness to impact inflation and disposable incomes; however, we are entering a prolonged tricky period for UK consumer spending. Consumers have been living beyond their means for a number of years, which is reflected in the large current account deficit and a low savings ratio. The authorities face a dilemma on interest rate policy: do they choose higher inflation through sterling weakness, or higher interest rates? Both could damage consumer spending prospects, which of late have been increasingly dependent on debt finance. Companies involved in unsecured and sub-prime lending will need watching closely for signs of distress. Car finance is a particular area of concern, along with its potential impact on residual values. As always, rising unemployment levels would be a worry, but I do not see this as looming.

Given all the economics and political uncertainties, I believe it is best to avoid making any knee-jerk changes to positioning. We will continue to monitor events closely and I will be looking to keep a significant overseas earnings exposure. As we have seen so far this year, sterling weakness does provide opportunities for international companies to buy UK corporate assets more cheaply, and I would expect to see further opportunistic takeover activity, which is clearly supportive for the stock market. 

 

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.