Investment Strategy:  First Quarter 2020 – Specific Market Reviews: United Kingdom

  • The UK has very much a BE (before election) and AE (after election) feel to it. In the dark days of ungovernable Britain before December 12th, Britain’s economy had been growing at the slowest annual rate in almost a decade with year-on-year growth in the three months to the end of September slowing to 1% from 1.3% in the second quarter. The UK economy did at least narrowly avoid a recession by growing 0.3% in the third quarter, having shrunk by 0.2% in the second quarter. Inflation remains muted, the CPI rising by just 1.5% in November.  Growth is like a ‘slow puncture’ caused by the global backdrop of the trade wars and the UK specific own-goal of three years of damaged business investment.  
  • Now though of course, hope is springing eternal. No-one thinks it’s back to the races but the medium-term outlook for the economy should be more positive. The election has removed the threat of Corbyn and given more clarity on Brexit so businesses can now begin to plan for the future, though of course this still remains a future full of doubt. The fiscal war chest Philip Hammond built up over the years is about to be opened as Boris makes good on his manifesto promises. The decade of austerity is finally over with increased fiscal spending, relatively low tax rates and deregulation to provide a business-friendly environment for companies to operate. Expect the NHS and the railways to have huge cash injections with a focus on the North and Midlands where Boris will not want his ‘borrowed’ Red Wall supporters to suffer voter’s remorse.
  • The Bank of England published its latest financial stability report in December and the results of its 2019 bank stress tests, declaring that the UK financial system is well prepared for even a worst-case Brexit and consequent trade war. This could be viewed as a swan song from the ‘unreliable boyfriend’ BoE governor Mark Carney, who is due to step down on January 31 and leaves the UK banking system in a good place to face an uncertain future. As for the new man at the BoE, Andrew Bailey, more of the same I suspect from the ex-Deputy Governor, a safe pair of hands and no upsetting the horses. The MPC will need to see solid evidence of an economic upturn before raising rates.
  • Not surprisingly, the election result was greeted by at least three cheers in the City. Firstly, it removed the ‘Corbyn discount’ embedded in stock prices and secondly, whatever your thoughts on Brexit, at least it provided some clarity on the future and ended a year of farce and despair. Even following the Boris bounce the UK equity market is trading on a P/E of 13x, which is a discount to Europe (14.5x) and the US (18x). With a dividend yield of over 4%, conservative eps estimates of just 7% and with three and a half years of nonsense and trauma finally over a much clearer political and economic outlook is likely to attract overseas investors to start fishing in British territorial waters again. 
  • As usual, the large overseas earners vs. smaller domestic companies dance goes on. Anything the markets consider positive on UK politics/Brexit resolution helps sterling and the domestics, anything negative hurts sterling but helps the huge multinationals who make most of their revenues and profits from overseas. It was level pegging until the final quarter during  which the domestics went tonto; for the year as a whole, the FTSE100 rose a very respectable 17% whilst the FTSE250 delivered a whopping 29% return.

Summary: The general election led to a ‘Boris Bounce’ as the ‘Corbyn discount’ was removed and a resolution of sorts was achieved with Brexit, ending the political paralysis of the last three years. Domestic stocks, in particular, were the biggest winners. The UK trades at a P/E discount to other developed markets and may now begin to reduce the performance differential it has suffered against other global markets since the 2016 referendum.

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