You were only supposed to blow the bloody doors off...
I woke up at 1.30 on Friday morning and made the mistake of checking the first few results. I never got back to bed. Whatever your political persuasion it is hard to see the election as anything other than a bad result for Theresa May. I think it was the best of possible results for the UK.
Anyone who has read my ramblings over the past decade or so will have gathered that I believe austerity was the wrong policy at the wrong time and that the decision to leave the EU was hugely misguided. Unlike many, I think it was right that May sought the approval of the electorate before the true Brexit negotiations started – I am delighted that approval was withheld.
There are many positives to take from the results. My natural leaning is toward progressive policies but I was concerned that under Corbyn’s friendly geography teacher persona lay a hard-left core that would simply see organised labour replacing the ultra-wealthy as the principal beneficiaries of socio-economic policies – leaving the many with little change. I was heartened by his acceptance of manifesto promises that conflicted with his own long-held views – his belief in party democracy appearing to trump his personal convictions. The Labour party now has a short period to rebuild, embrace those who had distanced themselves from Corbyn, and hopefully emerge nearer the centre with a deliverable alternative to austerity.
The rise of Ruth Davidson in Scotland has been a breath of fresh air. Her swift and unequivocal condemnation of the more illiberal views of the DUP was welcome, as was her assertion that country was more important than party. This makes a hard Brexit less likely. The young have started to engage in the political process. For too long people of my generation and older have had a disproportionate influence and it’s great to see this starting to reverse.
And finally, Theresa May’s weak and wobbly performance has demolished any semblance of steeliness – this is no Iron Lady. We can now move from the silly confrontational negotiating stance to one that seeks the best outcome for both us and our long-term European friends and allies. The best negotiations result in a win-win.
If I were a betting man my money would be on a Labour Government by Christmas, with a small majority, supported by a progressive alliance. I think the chances of us leaving the EU during my lifetime have receded considerably. The negotiating timetable was impossibly tight even before the election was called. In two years’ time we will enter an interim arrangement and there we will stay indefinitely or at least until everyone has long forgotten about Farage, Gove and the £350m a day.
So, if this prediction came to pass, what would it mean for investors? Broadly, it’s hard to see Labour’s spending pledges as any less realistic than the Tory’s. They would have been more appropriate in 2010; the risk now, especially against a background of falling immigration, is that we have too little productive capacity in the economy to absorb the additional expenditure and so risk stoking inflation, but they are at least pointing in the right direction. It is a great shame that Osborne abandoned the concept of a mixed economy in favour of a politically-motivated desire to reduce the size of the State. His failure to step in after the financial crisis, when the private sector was unable to, lies at the core of many of the tensions we now face.
We can look to the US for recent examples of both parties’ economic policies in action. Nationally, Obama introduced a Keynesian stimulus in 2010 that was not a million miles away from Labour’s proposals. It was universally accepted as being successful – covering its costs over a five-year cycle and stimulating growth. At around the same time the State of Kansas introduced tax cuts with the expectation that these would spur economic growth – along the lines the Tories are proposing. The Kansas experiment has been roundly judged to have failed. It would be too simplistic to cite two examples and draw firm conclusions, other than the Labour route does not have to lead to economic disaster.
While I would like to claim it was down to our skill, the fact is that much of the exceptional investment gains we have seen over the last twelve months have been illusorily. The fall in the pound after the referendum has seen the nominal sterling value of overseas assets and income increase. The real value of these gains will be eroded by inflation. Much of the currency depreciation was in the expectation of a hard Brexit. Any Brexit is going to be costly but a soft Brexit will be less so.
The UK economy is in a pretty dire place already. Last year we found ourselves growing at the fastest pace in the G7; in the first quarter of this year it was the slowest. This is after a 13% fall in the value of our currency and while we still have the benefits of full EU membership. It does not auger well for the future. Even before we have introduced controls, skilled immigration has fallen – in part because repatriated pounds are worth less but equally because foreigners no longer feel welcome – an aspect that leaves me both sad and ashamed.
With so much political uncertainty around Brexit it is simply not credible to assume private sector investment will step up to the plate to fill the gap left by a schism with Europe. The time for a mixed economic response that sees Government expenditure alongside private capital is surely now if we are to dampen the negative effects of Brexit. Against this background, Labour’s tax and spending plans appear not simply plausible but timely and essential. The housing market remains a concern and the election has not improved the outlook. The rise in the youth vote will mean all parties will shift their focus to improving the lot for this cohort – which boils down to fixing the housing market. There is no pain-free way forward. The failure by successive Governments to boost supply has led to housing becoming an over-priced asset while the growth of the buy-to-let sector has increased risks. An increase in supply coupled with reduced demand on the back of lower immigration will see prices fall. With luck this will be experienced as depressed future growth – history suggests it is more likely instead to be a dramatic correction. The housing market is key to consumer confidence. Although we cannot spend the value of our homes they nonetheless exert a strong psychological influence. If house prices are rising we feel more confident and are more likely to spend, and the opposite when they are falling.
Compared to global market capitalisations our core portfolios have a UK bias. The justification for this rests on the multinational nature of many UK listed firms and the perception of relatively low political and currency risks. Over coming weeks we will be looking carefully at the extent this bias remains justified and the degree to which our portfolios are exposed to the effects of a strengthening pound if the risks from a hard Brexit continue to diminish. We have a reasonable exposure to smaller and mid-cap UK companies. Although these reflect factors that are likely to see stronger returns over the long term they are also firms that will tend to be more dependent on the domestic economy. We will be considering whether the extent of our tilt towards these areas remains appropriate.
Overall, these are minor tweaks to our long-term strategy. We remain of the view that in these uncertain times diversification is the key to managing risk.
Keep calm and carry on!
Richard Ross June 2017