Houses of Parliament

An Alternative View to Political Outcomes

12 Jul 2018

Ben Kumar, Investment Manager

We suggested last month that ignoring politics was the best approach for investors. It feels as if politicians here and abroad have taken that as some sort of challenge to really step up the drama – don’t they know that there’s a World Cup on?! So, is there any signal among the noise that should worry us?

Looking at the UK first, the strength and stability that Theresa May has always promised seems to be more in danger than ever. There can be no doubt that the departure of David Davis and Boris Johnson from the cabinet is a blow to the Conservative government, and to the Prime Minister.

However, I’d like to offer an alternative take that challenges the conventional wisdom (and media frenzy) on just how bad an indicator it is. Usually, when a senior member of government departs, it reveals previously unseen fractures and fault lines within the party. In this case though, even the most excitable of headline writers would be hard pressed to describe the divisions within the Tory ranks as a ‘scoop’. A resignation on a point of principle has much more impact if you haven’t been griping and sniping about the issue for months (in Davis’s case) or sacrificed so many other principles already (remember Heathrow, Boris?).

Furthermore, it could well be argued that the negotiations with the EU will not suffer much from the loss. It has been clear for some time that May was centralising the negotiation process – in September, she asked Olly Robbins, the top civil servant in Davis’ Department for Exiting the EU, to come and work for her directly. Similarly, Johnson has been sent on various excursions around the world since he became Foreign Secretary. May has clearly been happy to take the chance of Johnson making a small international faux pas, in order to keep him away from making a larger one at a negotiating table closer to home. Given the history here, it is tough to disagree with that line of reasoning. So, if May can preserve her place in power, the negotiations ought not to be affected too much. In such a world, Sterling should continue to be reasonably stable, as investors continue their wait-and-see approach.

The other alternatives are a Conservative leadership contest or a general election. It is too soon to have a clear picture of how likely any of these are, but one thing we can say is that if either of them come to pass, the Article 50 deadline of 29 March 2019 is likely to be extended. This would probably mean more volatility for the Pound in the short and medium term as investors have to reappraise British politics yet again.

“Sterling should continue to be reasonably stable, as investors continue their wait-and-see approach.”

In the long term, however, we don’t see anything hugely worrying about the UK economy, and perhaps more reassuringly, neither does the Bank of England. The UK is still growing at a relatively healthy rate, with even the construction sector now looking a lot more positive than a few months ago. We would expect to see a rate rise before the end of summer, and then a long pause before any further moves, as the gradual return to a normal policy environment continues. With that in mind, we still think that UK assets offer opportunities that international investors have dismissed.

Outside of the UK borders, worries over European politics have faded, although that might just be down to the EU uniting against Donald Trump and the US tariffs.

We have no clearer a view than anyone else on just how far Trump is willing to go in a potential trade war – perhaps he doesn’t quite know himself yet. We have a suspicion though that one of Trump’s key indicators is the US equity market, and that any clear signs of pain there might prompt a change of course.

Elsewhere, there has been some pain already, particularly in the emerging markets. Given our positive outlook on global growth (more details of which will be published in our quarterly report), much more of a downwards move in risk assets could open up some interesting opportunities for investors who are prepared to tolerate the short term volatility.

 

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