Given the evolving situation we face in the UK across the economic, policy and political landscape, we have decided to focus this investment update on the domestic environment. We therefore provide our views on the economic backdrop, expected policy environment, the general election, whilst reiterating our current strategy across your portfolios.
Economic Backdrop and Policy Support
The UK economic data has been volatile this year and clearly points to a downshift in growth. The weaker global environment and Brexit uncertainties have unquestionably impacted negatively upon businesses, with corporate investment declining for four of the last five quarters. At the same time, global trade tensions have weighed heavily on exports. On a more encouraging note, household spending – the biggest component of Gross Domestic Product (GDP) – has remained resilient, with consumption supported by a robust employment market and sustained growth in real incomes. It is noteworthy that annual pay growth stands at the highest rate in over a decade.
Looking ahead, the lack of clarity over the future trade relationship with the EU will continue to oppress business sentiment. This leaves the consumer as the only real driver of growth. With consumer confidence sliding, and tentative signs of a slowdown in employment growth, there is no obvious boost to growth from this quarter. As such, in the absence of a major policy stimulus the economy looks set to grow by a mere 1-1.5% over the next few years. A positive resolution of Brexit could, of course, be a catalyst for an uplift in investment.
While the Bank of England has repeatedly stated its preference for higher rates, the Bank base rate remains firmly entrenched at 0.75%. With the Brexit uncertainty set to continue into the New Year, and the absence of a sharp downturn in growth or a major uplift in wage growth, it seems unlikely that monetary policy will move significantly in either direction.
The emphasis has turned towards fiscal policy as a means to boost growth. The Chancellor recently announced in the 2020/2021 Spending Review that public spending would rise by 4.1% in real terms, the largest increase in 15 years. As we head towards the December general election, both major parties plan to raise this level even further, and thus government spending will be a stabilising force for the foreseeable future.
UK General Election
A highly uncertain general election is happening on Thursday 12 December. Our analysis of past UK elections shows the potential for a slim Tory majority with Labour most at risk of losing those marginal constituencies where there was a clear vote to ‘Leave’ the EU. Both main parties will likely lose their Scottish seats to the SNP and heavy ‘Remain’ seats to the Liberal Democrats. Much will also depend upon whether:
- the people give the Conservatives another chance after 10 years of austerity and the shambolic last three years,
- the Brexit party file candidates against the Tories and eat into their share of the vote, and
- the Liberal Democrats take more votes from Labour or the Conservatives.
The three most likely outcomes focus around either a Conservative majority, a Labour-led government or a hung parliament, and the probabilities of each are likely to fluctuate over coming weeks. As one would expect, a Conservative majority would be more business friendly than the Labour alternative. Aside from economic policy the implications around the Brexit process are likely to take centre stage. The perception is that a Conservative government would be bullish for domestic assets (currency, equities, and credit), however, Johnson’s deal removes the UK from the EU customs union. This will quickly turn investors’ focus to the concern that a trade deal with Europe may not be reached by the end of the transition period, to avoid moving to World Trade Organisation trade terms. Whilst the other potential outcomes may create hope of a more collaborative solution with Europe, ultimately this will contribute to a prolonged period of uncertainty that will continue to hit business investment.
Brown Shipley’s Investment Strategy
We continue to manage investment strategy with an emphasis on diversification. Due to the well-known risks around economic growth we remain slightly cautious on equity markets at this stage. Although fixed income assets remain far from attractive at their current levels of yield, we maintain a healthy allocation which should act as an effective diversifier.
Diversifying sources of return remains important, leading to the allocation across alternative strategies that are less driven by market direction. Your portfolios continue to be actively managed, allocating across a number of best in class managers across the industry.
If you would like to discuss any of the investment themes raised in this article do not hesitate to contact your usual Brown Shipley Adviser.Toby Vaughan
// Chief Investment Officer