Last Thursday marked 99 years since the second of two plebiscites that finally settled the infamous ‘Schleswig–Holstein Question’. Lord Palmerston, the Victorian prime minister, captured the question’s difficulty: “Only three people have ever really understood the Schleswig-Holstein business—the Prince Consort, who is dead—a German professor, who has gone mad—and I, who have forgotten all about it.”
What might he make of the ‘Brexit Question’? There was certainly plenty to baffle the curious onlooker last week. First, MPs roundly rejected the prime minister’s deal – again. The Commons then voted against leaving the EU without a deal (albeit in a non-binding vote). Two amendments proposing long delays to Article 50 were voted down. And yet the week was only half-done. The following day, MPs rejected a second-referendum amendment; a proposal for Parliament to take control of the legislative agenda (which lost by a mere two votes), and a Labour amendment calling for a Brexit delay to enable a different approach. A government motion, however, was passed to extend the Brexit process.
In terms of drama, this was Westminster’s very own Theatre of the Absurd. One Brexit minister who had resigned over Theresa May’s Brexit deal now voted in favour. The current Brexit secretary told the House to vote with the government on its Brexit-delay amendment, only to then vote against it himself. Members of the Cabinet and Shadow Cabinet both defied their party whips but remained in post – and yet claimed that collective responsibility remained a reality. Ignoring Einstein’s definition of insanity – trying the same thing over and over again but expecting different results – the prime minister concluded that the best reaction to the fourth-largest government loss in parliamentary history was to hold… a third vote. Crazier still, some think she might win it.
Amid such political mayhem, it is worth casting an eye back to the apparently humdrum realities of economic and financial life. After all, three years of political cul-de-sacs hasn’t been such a bad time to be invested in the UK.
“Odd as it may seem, the period of huge political uncertainty and slower economic growth triggered by the referendum result has been a pretty good time to invest in UK-listed companies,” said Phil Woodcock, Head of Investment Communications at St. James’s Place. “Despite higher volatility, the FTSE 100 is up some 14% since the eve of the referendum. Even the FTSE 250, which is far more exposed to the UK economy, has risen by more than 12%.”
The FTSE 100 enjoyed a strong week, even as sterling rose (the latter, on the belief that a no-deal outcome had become more unlikely). Yet if history is any guide, the UK equity market may yet have far to go.
“The UK equity market remains undervalued in historical terms,” said Neil Dobson of Invesco Asset Management. “Once there is a Brexit deal – a divorce agreement – and greater clarity, we expect that valuation gap to narrow.”
And what of the economy? Last week’s Spring Statement by the chancellor was overshadowed by Brexit but contained good news. Growth forecasts for 2018 were cut from 1.6% to 1.2%, but public borrowing is set to fall to 1.1% of GDP, and the Treasury forecasts the creation of 600,000 new jobs by 2023. The chancellor pledged a ‘deal dividend’ of public spending post-Brexit, enabled by much-improved public finances – he should have more than £26 billion in slack, rather than the £15 billion mentioned in the Budget last October.
“The key point, though, is that despite the huge amount of political uncertainty, the economy is holding up well,” said Capital Economics. “The news that GDP rose by 0.2% in the three months to January and by 1.2% over the past year means the UK is growing at a faster rate than Germany, France, Italy and Japan.”
Conversely, growth figures among major EU economies offer a mixed picture. Germany’s latest figures mean it has only narrowly avoided a manufacturing recession. In theory, slowing growth could yet help populist parties at European Parliament elections in May, although some believe the experience of Brexit may keep populist euroscepticism in check.
“One perceived risk of the elections is a further rise in populist support, but I don’t see that having a disruptive influence,” said Ken Hsia of Investec, manager of the St. James’s Place Continental European fund. “After all, no politician will want to put themselves through what Theresa May has been through, which is why I believe further fragmentation of the EU is off the agenda for now.”
The EURO STOXX 50 enjoyed a strong week, as did major indices around the world: the TOPIX index in Japan and S&P 500 both enjoyed gains; the Shanghai Composite rose more marginally. In the US, technology stocks led the rally, which survived news of weak US inflation and retail sales, and the tragic crash of a Boeing 737 MAX 8 in Ethiopia. Boeing saw its largest single-day drop on markets since 2001, although it was already recovering on Friday. At the end of January, it announced especially strong earnings.
“We have held Boeing in the fund since February 2018,” said Mark Baribeau of Jennison Associates, co-manager of the St. James’s Place Balanced Managed fund. “Until the black box analysis is completed, the cause cannot be ascertained… [and] the financial ramifications… cannot be credibly quantified. We continue to have conviction in Boeing’s strong brand, market position, long-term order backlog, and balance sheet. We are estimating double-digit operating cash flow growth over the next several years.”
Invesco, Investec and Jennison are fund managers for St. James’s Place.
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