“A house divided against itself cannot stand.” The wisdom of Abraham Lincoln (see picture) may have stood the test of time, but then historians’ favourite American president1 didn’t have a sibling high up in politics.
Last week’s Johnson & Johnson fraternal rift is simply the latest in a line of divisions that began to dominate domestic politics in 2016. In some cases, the divisions have kept widening ever since – witness the ongoing bifurcation of the Conservative Party, which last week lost its working majority in the Commons and saw a number of heavyweight MPs expelled from the parliamentary Conservative Party.
When any general election will be, nobody knows. When Brexit will happen, what form it will take, whether it will be stopped, nobody knows. Whether Boris Johnson will be prime minister at the end of October, nobody knows. Whether there will be a vote of no confidence in the government, potentially called by the prime minister himself, nobody knows. Just when it seems uncertainty can’t increase any more, it seems to reach for a new high. Amid such uncertainties, we refuse to speculate, but a general election may be the only way out of the current impasse.
“Currently, many assume that the Tories would be overwhelming favourites to win such a vote,” said Mark Dowding of BlueBay. “However, we are sceptical as to how many seats the Tories can win in traditional Labour seats in the North. Meanwhile, Labour’s election chances could further be enhanced were Jeremy Corbyn to agree to step aside at the upcoming Labour Party Conference. It is quite possible we will see another UK prime minister in 2019, putting Boris at risk of being the only one to never win a single vote in parliament.”
As ever, sterling has been the bellwether of Brexit developments; and, generally speaking, when the prime minister’s stock has fallen (such as when he lost those four votes in the Commons), sterling has strengthened on rising expectations that a no-deal Brexit will be averted. It has been traditional for the FTSE 100 to head in the opposite direction to sterling, given the weight of foreign earnings generated by FTSE 100 companies. Of course, the UK’s crisis is not the world’s crisis – the UK accounts for just 2.25% of global GDP; but Brexit is likely to continue to have short-term implications for sterling investors.
“It’s been pretty clear for some time that the Brexit uncertainty has hit investment hard, although we are not expecting a no-deal Brexit but some kind of deal in the first or second quarter,” said Azad Zangana, Senior European Economist at Schroders. “If you have to be in sterling and are worried about a no-deal Brexit, you’d rather be in the FTSE 100. But if there’s not going to be a no-deal Brexit then the FTSE 250 is a better option; although investing overseas is arguably even better in terms of your overall portfolio.”
At a global level, equity investors lost interest in Brexit some time ago, in great part because it’s increasingly seen as more or less a British issue; and their attention these days is trained primarily on global growth, company earnings, central bank policy, and the US–China trade war. Central bank policy has been softening as investors had hoped, but that is in great part because both global growth and company earnings appear to be losing momentum.
Last week, Oxford Economics, Bank of America Merrill Lynch and Bloomberg Economics downgraded their China growth forecasts to below 6% – and China accounts for almost 10% of global GDP. The Chinese president needs growth of 6% to reach his 2020 target and, on Friday, The People’s Bank of China duly delivered a stimulus, cutting the cash reserve ratio banks must hold to its lowest level since 2007 – a mere 0.5% (worth $126 billion of liquidity, it claimed). Further worries came in the form of a plunge in industrial orders in Germany, the addition of fewer new jobs than expected in the US, slowing growth in India and Australia, a technical earnings recession in the US (meaning profits have fallen for two straight quarters), and a decline in US business confidence.
Yet what mattered on markets last week was not so much growth or earnings as the US–China trade war. Indeed, the S&P 500, Shanghai Composite and Japan’s TOPIX all rose last week, thanks to plans being announced for senior Chinese officials to take part in a new round of talks in Washington. Yet trade is not the only sticking point for US–China relations: last week, China signed an oil and trade deal with Iran, and the troubles in Hong Kong continue to divide opinion.
One worry on markets, however, has begun to subside. Italy, thanks to its new, more EU-friendly government, is proving more attractive to bond investors. Since Matteo Salvini’s (Northern) League left the government, the yield on Italy’s 10-year debt has dropped below 1% for the first time in history.
“For Italy it’s very important to have this closer relationship with Brussels. Creating confrontation only means the European Commission and Northern European countries are less willing to help Italy out and give it leeway when it comes to budget rules,” said Nick Andrews of Gavekal Research. “Also, lower yields mean lower interest rates can be passed onto the broader economy, so that should ease financial pressures in the economy. With Salvini out of government, a major risk has been removed.”
1 Survey by C-SPAN, 2019
For many in the UK, now feels like a time to avoid taking on risks. The prolonged political uncertainty has already harmed the business and investment climate, but the uncertainty is far from over. It comes as no surprise, then, that many business owners are looking to extract cash, rather than seeking out new customers or trialling new lines of business.
Yet such a decision comes at a sensitive time. Those looking to extract cash have in recent years sought to benefit from Entrepreneurs’ Relief, which was introduced 11 years ago to encourage entrepreneurship. It is a valuable allowance, but recent comments by politicians suggest the advantage may be shaved down, or even removed altogether.
As a result, any business owner thinking about an exit strategy, or just about a major cash release, would do well to start planning ahead as soon as possible, and understanding some of the nuances, not least how HMRC defines whether your business qualifies for the allowance.
It is perhaps harder than ever to predict where British politics will head in the next few days, let alone weeks and months. But with some careful planning, business owners can be ready for any changes that might come.
In The Picture
Preparing a child for financial independence isn’t just about investing. It’s also about education. Financial education has been on the national curriculum since 2014, but the last OECD rankings show that the UK is below average when it comes to teaching children about managing money. In this video, we introduce how financial education works, and why it matters.
The Last Word
“Minister Jo Johnson quits to spend less time with family.”
How the BBC reported Jo Johnson’s decision to step down
BlueBay and Schroders are fund managers for St. James’s Place.
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