Quo Vadis Britain?

23 June 2017

It is almost exactly a year since Britain’s electorate voted to leave the EU. In the 12 months since, extraordinary consumer resilience first catapulted the UK to the top of the G7 growth league and then returned the nation down to the bottom end. Likewise, in politics, what started with an embarrassing political meltdown, developed into what looked like it would be the biggest political majority in generations, only to crumble back down into embarrassment and uncertainty.

Unfortunately, this time around global economic growth is not surging but very likely rolling over, and so things have started to look slightly bleak from a UK perspective. While France’s new president managed to win a second landslide election that gained him a formidable majority for his party in parliament, the content of the Queen’s speech was more of a reminder of all the initiatives that had been scrapped from the Conservative’s manifesto, rather than a rallying cry for a brighter future.

There was plenty of speculation whether the severity of the situation had persuaded her majesty the Queen to abandon her strict political neutrality, and make a pro-European gesture. Even if it was (or was not) just a very implicit wardrobe statement in the form of an ambiguously designed hat, nevertheless it further encouraged those who see the election outcome as a mandate for a different interpretation of last year’s Brexit vote.

The formal start of the negotiations appeared to have been scripted before the election outcome, with the hard Brexit tones of leaving even the customs union leading to widespread consternation from Britain’s business representatives. Theresa May’s offer to permit most EU citizens currently residing in the UK to stay indefinitely sounded far more in line with the new direction of a somewhat more business accommodative Brexit route.

Even though this move ended 12 months of unpleasant limbo for 3 million EU citizens resident in the UK, capital markets did not seem to pick up on the subtle change in direction. £-Sterling came under pressure once again against the €-Euro and the US$. It is entirely possible that the exchange rate has temporarily lost its political marking function and is now once again more sensitive to the fundamentals of economic changes. Here, the fact that the rest of the EU continues to accelerate while the UK is slowing provides ample reason for currency weakness, despite a wind of change in political positions.

Capital markets in general experienced a fairly uneventful week, with the exception of the oil markets. When the oil price fell through the 45$/bbl mark, oversupply was the most quoted explanation, and economic strategists around the world debated whether this would lead to a repeat of an energy sector driven slowdown in demand for industrial goods. We slightly disagree, and would point to declining demand from China, while supply has most probably not changed at all. In a separate article, we discuss the dynamics in more detail, and compare and contrast with the developments 18 months ago.

The political situation in France has morphed from one of the most substantial threats to the EU at the beginning of the year to now seemingly Europe’s saviour. In a piece dedicated to discussing the challenges awaiting president Macron – despite his absolute majority in parliament – our guest economist Duncan O’Neill has a good look at what will be top of his reform agenda and why.

We also give a brief update on some growth surprises in Japan, as well the relevance of the inclusion of the Chinese equity market in MSCI’s global equity indices. Finally, this week’s edition is rounded off with an insight piece by Sam Leary about shifting landscapes in the world of supermarkets, after internet retail giant Amazon is increasingly acquiring grocery retail operations.

All in all, we picked up further evidence over the week that supports our central investment case that global economic growth is slowing somewhat and is likely to challenge current share price valuations in the US, which are assuming more profit growth than may not be forthcoming. However, there is very little to suggest that our longer term outlook beyond the next 6 months should assume any more than another growth blip.

In an entirely Tatton related matter, it takes me great pleasure to report that we have given notice of our intention to take our company public and list on the UK’s AIM section of the stock exchange. We feel that this is the right step to give our business the corporate format and public profile that adequately reflects the dimension our business has achieved. Readers may also interpret the timing of our IPO as an expression of our conviction that this current global economic and capital market cycle has a number more years before its growth dynamics fade.

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