If we look through the tension and division that have characterised the UK’s national discourse in the period since the 2016 referendum, and turn our attention instead to real economic data, it becomes clear that, over a period of about two years after the vote, “Project Fear” had little discernible impact on the UK economy, which expanded by an average of approximately 0.5% per quarter.
Over the course of 2019, however, there have been growing signs that the ongoing uncertainty over the UK’s future relationship with its nearest and largest trading partner has started to weigh on both business and consumer confidence. For consumers, growing concerns have manifested themselves, for example, in a rising propensity to postpone major purchases.
The economic expansion over recent years has been fuelled, largely, by improvements in the labour market, itself of course driven to a significant degree by the confidence of businesses to invest and hire staff.
Few commentators will be surprised that persistent political uncertainty is causing the rate of economic growth to slow; expect to hear certain politicians heavily caveating any of the more challenging economic data that might emerge in the months ahead.
While the publication of gloomier economic data would be unlikely to contribute to our collective festive cheer any more than the general election campaign that is now unfolding, we should be able to take comfort from the fact that the UK is now seeing real-terms wage growth, which had been conspicuously absent for too long.
This is something to be celebrated, and there is good cause to believe that the encouraging trend will continue into 2020, in part thanks to the commitment of both main political parties to raising the minimum wage.
Both the main parties are also firmly committed to dramatic expansions in fiscal spending; if we can remove the impediment of what I have long referred to as the “Brexit handbrake,” then growth in consumer spending should soon follow.
The counter-argument to this optimistic base case is that, even assuming that some form of the Withdrawal Agreement Bill passes all of its legislative phases after December’s general election, and the UK avoids a no-deal exit from the EU, businesses may nevertheless continue to postpone investment decisions until there is much greater clarity on the shape of the UK-EU economic relationship.
My own view is that the psychological boost that would flow from any sense of progress in the Brexit process should be sufficient to send consumers and, perhaps to a slightly lesser extent, businesses, reaching for their wallets.
But what of the other perceived risk to economic and stock market stability, namely a government led by Jeremy Corbyn? Well, if a straw poll of wealth managers at a conference I spoke at last week is anything to go by, this is a low risk: 82% of respondents expect the general election to result either in a Conservative government, or a Tory-led coalition, with the latter thought marginally more likely. Not a single member of the audience expected a Labour government, and a mere 5% forecast a Labour-led coalition. Given similarly dismal public poll ratings for the Labour leader, it is difficult to conclude anything other than that Corbyn’s chances of entering Downing Street are slim. That being said, as the last three years have reminded us repeatedly, a week is a long time in politics.
If the twin concerns for investors – a no-deal Brexit and a Corbyn-led government – are off the table, I believe we should see a marked turnaround in investment flows into the UK’s many excellent listed companies. The marked strengthening in sterling relative to both the US dollar and the euro in recent weeks would add further credence to this suggestion.
Put another way, I believe that the building blocks are in place for the UK stock market to recoup much of the ground that has been lost relative to many of its developed-market peers. This has not been missed on international investors, who have been keen to snap up high-quality UK firms at unreasonably depressed prices; the recent announcement of the acquisition of the 270 year-old brewing giant Greene King plc by Li Ka-shing, Hong Kong’s richest man, springs to mind.
The question now is whether the UK’s domestic investors will recognise that Mr Li, and others like him, may well be on to a rather good thing.