Our Opinion: 2019

Time to buy Britain

This time last year, Britain looked virtually ungovernable. Theresa May had just survived a ‘no confidence’ vote in the House of Commons, but her days as Prime Minister were numbered. With open rebellion in her own party and no way to pass her Brexit deal, the UK was gridlocked. Fast forward to today….

The Conservatives, under Prime Minister Boris Johnson, have secured a majority of 80 seats – far more than expected. Britain now has its first solid majority government in 14 years. Not only that, it’s the first such Conservative government in 32 years.

What does this mean for investors?

The most obvious change is on Brexit. Britain will leave the European Union (EU) on 31 January. A ‘transition period’ during which to negotiate a new deal with the EU then follows. The aim is to have this wrapped up by the end of 2020. If not, the relationship will be governed by World Trade Organisation (WTO) rules. The government has formally ruled out any extension to the deadline, with the goal of focusing minds on getting a deal done quickly and also on showing to sceptical ‘leave’ voters that Johnson is serious. That means markets still have the spectre of a ‘hard Brexit’ to fret about – but at least they know that the process has a genuine end point to prepare for now.

Another big shift is that the government will be spending a lot more. One focus will be the north and the Midlands, where lifelong Labour voters turned Conservative rather than vote for Jeremy Corbyn. The new government is likely to make significant investment in the region, on improving the rail network in particular. The other beneficiary is set to be the NHS, with the government committing to spending an extra £34bn on the health service by the 2023/2024 tax year. The Office for Budget Responsibility – the UK’s public spending watchdog – is unlikely to welcome it, but Chancellor Sajid Javid (like every single one of his predecessors) will no doubt find a way to finesse the situation so that it looks as though the government is sticking to one made-up fiscal rule or another, when he finally gets to deliver his first budget in February or early March.

Finally, there’s the shake-up of the civil service, under Dominic Cummings, the strategist behind both the Conservative victory and the ‘leave’ vote in 2016. Cummings has often criticised the civil service in lengthy blogs on the topic – now he has the chance to put his ideas on improving things into practice. Overall, reports the Financial Times, the idea is “to help develop a post-Brexit economy – focusing on boosting northern England – and to update UK foreign policy based on the concept of ‘global Britain’”. So far that includes, among other things, a new energy and climate change department.

 From an investment point of view, the election has already achieved two main things. Firstly, it has removed the need to apply a ‘Corbyn discount’. The share prices of companies in the sectors most at risk of nationalisation under a Labour government have been the ones to recover most resoundingly following the vote. And more broadly there is general relief that the UK has reaffirmed its commitment to free-market capitalism, rather than a return to widespread state ownership and punitive taxation. So from that point of view, the UK is no longer “uninvestable”, as some particularly excitable analysts have suggested at various points over the last few years.

Secondly, it provides some certainty on the Brexit process. While the process will have several ups and downs over the coming year – Johnson’s plan to rule out an extension beyond the end of next year is already rattling markets afresh – the fact that the British negotiators will no longer have to contend with being undermined at home at every turn also means the direction of travel during the process will be clearer. If nothing else, the sense of sheer pandemonium that prevailed throughout the last couple of years is now over.

How does that translate into markets? Firstly, the Pound. Sterling will bear the brunt of the ups and downs of the Brexit negotiations next year. Until our future relationship with the EU is done and dusted – which will probably take most if not all of next year to sort out – the pound may not strengthen drastically. in the longer term, a stronger pound seems like a good bet, perhaps gaining 7%-8% a year from here.

Secondly, house prices. If you’re selling a property in a prime area of the UK, particularly London and the southeast, you can expect an easier ride this year. Overseas buyers are no longer being put off by the threat of a Corbyn government and have also realised that the pound’s nadir is probably now in the past.

However, if you’re a residential landlord hoping that the good times will return, don’t get your hopes up. The Tory government will be less painful for landlords than a Corbyn one would have been. But given how hard the Conservatives have already been on landlords, that’s not really saying a lot. The government plans to get rid of ‘no-fault’ evictions, create a system whereby deposits can be transferred between rentals, and impose further rules on energy efficiency. None of this is bad. But it is clear that the trend towards greater regulatory pressure on landlords won’t change. So, don’t expect a revival in buy-to-let.

On a wider point, governments are realising that soaring house prices are no longer a political necessity, but a political liability. The government will hopefully realise that its efforts should focus on increasing good quality, affordable housing supply in areas where it’s needed, rather than propping up prices through schemes such as Help to Buy.

Thirdly, equities. The UK stock market is arguably where the greatest opportunity lies for investors. Since the referendum in 2016, UK mid- and large-cap equities have underperformed those in other major markets, whether you measure in dollar terms or local currencies. That means there’s a lot of scope for UK equities to play catch-up with the rest of the world. For example, pre-2016, the UK traded on roughly the same valuation (as measured by the price/earnings ratio) as the US. Now it’s 25% lower. This is happening at a time when global investors are starting to wonder if it’s time for the rest of the world to break its long period of underperformance against the US. That suggests a lot of money will be seeking the most promising turnaround plays – and the UK fits the bill.

However you decide to get exposure, with the pound likely to rise in the longer run and relative political stability on the cards for several years, now is almost certainly a good time to increase your allocation to UK equities and benefit from a Boris bounce.

30th December 2019