Political Turmoil, Investor Confidence and Brexit

With the latest news that Theresa May faces a leadership challenge and recent events in Parliament, it’s worth commenting on the impact on the stock market. These gyrations have generated an enormous amount of uncertainty among investors. The result is that few investors are buying even after share prices have fallen substantially.

The general trend in the UK market is down, the pound is falling and overseas investor confidence (which is key to prices of large cap stocks) must have been damaged by the headlines that they see. Will the UK face a “hard” and damaging Brexit, or even a change to a Labour Government? Overseas investors will have even less of a handle on those risks than UK investors so are running scared.

The fall in the pound should help the profits of many UK listed companies. But even the shares prices of those companies who might benefit have been falling. That applies particularly to small cap companies. Many small cap stocks have limited liquidity and the liquidity provided by private shareholders has been disappearing as those with limited stock market experience have suddenly realised that the markets are not a one-way system where you consistently make money after ten years of positive market trends. They are taking their profits and sitting on their hands.

We are in a “negative momentum” situation where falling share prices drive further falls as trend followers ignore fundamental valuations and sell regardless. This will not change until share values start to look very cheap. The decline in US markets has also undermined investor confidence generally, and has a big influence on the UK market.

There could be a sharp recovery in share prices if confidence returns – after all the UK and worldwide economies are doing well. But confidence will not return until there is some sight as to how the Brexit problem will be resolved.

Theresa May has certainly got herself and her party into a very difficult situation. She signed up to an agreement with the EU over withdrawal that many in her party, and in the DUP who she relies upon for votes, do not like at all. Instead of simply telling the EU that the deal has to be renegotiated, as any firm leader would have done, all she has been doing is going around Europe asking for “reassurances” on the back-stop. The EU bureaucrats (Juncker et al) might have said that they won’t renegotiate it – so would I knowing that Mrs May does not have enough support to take a firm position and time is rapidly running out. But the EU needs a deal to protect its economic interests. They might hope that Britain will reconsider and stop the Brexit process altogether but that is not consistent with the views of the majority of the UK population so is unlikely to happen. Even if a general election was called over the issue, it is not clear that Labour would run on a manifesto committing to rejoin the EU as a lot of their traditional supporters do not like the EU and are affected by the unlimited immigration that has resulted from free movement of people.

The answer therefore is to replace Mrs May with someone who can provide firmer leadership including taking a risk on a “hard” Brexit with no withdrawal agreement if necessary. The latter would not nearly be so damaging as some predict and would put the UK in a very strong position to negotiate a trade deal that is in our interests (and with no complications over Northern Ireland as that issue could then be simplified to avoid a hard border).

My view is all deals are renegotiable if either party no longer supports it. Therefore we need to “withdraw from the withdrawal agreement”, i.e. repudiate it and start again. There are many aspects of the EU Withdrawal Agreement and the proposed future relationship that make sense, but some aspects of the former need changing.

Well those are my views on the political situation. Others might disagree. But so far as investors are concerned, improving confidence in the future economic and political landscape is the key to improved share prices. That seems unlikely to happen under Mrs May’s leadership however much one recognises that she has been trying her best in difficult circumstances.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Brexit – Good or Bad?

Prime Minister Theresa May convinced her ministerial colleagues to back her Brexit vision, but now our Brexit negotiators David Davis and Steve Baker have resigned and there are grumblings from the “hard” Brexit wing of the Conservative Party. Like no doubt many Brexit supporters I am somewhat puzzled by this outcome mainly because it is not at all clear what the plan is in detail, nor what the ramifications are. But it’s worth reading the letter sent by Mrs May in response to David Davis’s resignation letter. It included these words:

“At Chequers on Friday, we as the Cabinet agreed a comprehensive and detailed proposal which provides a precise, responsible, and credible basis for progressing our negotiations towards a new relationship between the UK and the EU after we leave in March. We set out how we will deliver on the result of the referendum and the commitments we made in our manifesto for the 2017 general election:

  1. Leaving the EU on 29 March 2019.
  2. Ending free movement and taking back control of our borders.
  3. No more sending vast sums of money each year to the EU.
  4. A new business-friendly customs model with freedom to strike new trade deals around the world.
  5. A UK-EU free trade area with a common rulebook for industrial goods and agricultural products which will be good for jobs.
  6. A commitment to maintain high standards on consumer and employment rights and the environment.
  7. A Parliamentary lock on all new rules and regulations.
  8. Leaving the Common Agricultural Policy and the Common Fisheries Policy.
  9. Restoring the supremacy of British courts by ending the jurisdiction of the European Court of Justice in the UK.
  10. No hard border between Northern Ireland and Ireland, or between Northern Ireland and Great Britain.
  11. Continued, close co-operation on security to keep our people safe.
  12. An independent foreign and defence policy, working closely with the EU and other allies.

This is consistent with the mandate of the referendum and with the commitments we laid out in our general election manifesto: leaving the single market and the customs union but seeking a deep and special partnership including a comprehensive free trade and customs agreement; ending the vast annual contributions to the EU; and pursuing fair, orderly negotiations, minimising disruption and giving as much certainty as possible so both sides benefit.

What exactly are the moaners complaining about if that deal can be achieved? Their concerns seem to be focused on points 5 and 6 above. Will adopting common product standards (or whatever EU standards they might determine subject to UK Parliamentary consent) really hobble the UK and make it difficult for us to negotiate trade deals with other countries? I do not see why – it just means that exporters to the UK will need to comply with UK/EU regulations just as UK exporters to the USA now have to comply with US products rules and regulations. What is so difficult or damaging about that?

Note that only industrial and agricultural products are covered by these proposals. Services are not so such matters as financial regulations where the EU has been particularly inept will presumably fall into abeyance unless we decide to conform. But such phrases as “A commitment to maintain high standards on consumer and employment rights and the environment” do need explaining more – does this mean we have to accept EU regulations or what in those areas?

With those reservations otherwise my view is that if Mrs May can achieve her objectives this would look to me to be a reasonable outcome as it will meet the main objectives desired by Brexiteers. Sovereignty and the ability to lay down our own laws and regulations in most areas and in a democratic way will be returned to us. Would anyone care to explain to me why it is otherwise?

But whether these proposals can be agreed with the EU is another matter of course. Perhaps David Davis has resigned because he sees the impossibility of getting their agreement to this “fudge”. The borderless objective in Ireland looks particularly problematic. We need a clearer explanation of how that might work in practice.

My conclusion therefore is that this might be a way forward, but the game of Brexit negotiations is a long way from being concluded.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Theresa May’s Speech, Housebuilding and Organ Donation

Theresa May’s speech to the Conservative Party conference was indeed a debacle in terms of presentation. But the content was worthy of more analysis.

The shortage of houses, particularly in the South-East of England, is a persistent and major political problem. Young voters have great difficulty in finding accomodation, while the old profit from rising (and unaffordable to the young) house prices. This leads to divisions in society that populist and left-wing leaders can exploit.

So what is the Prime Minister and the Government going to do about it? They have promised to spend another £10bn on the “Help to Buy” scheme which has improved the share prices of the housebuilding companies I own already. This may well enable some people to buy houses that they could not otherwise manage to do, but it is also likely to increase house prices rather than reduce them.

In addition, she has committed to spending £2bn to fund more affordable housing with measures to ensure councils release more land for housing, and encourage developers to actually build more homes.

These are positive moves, but it’s only tackling one end of the supply-demand equation. One of the core problems is over-population in the South-East and a concentration of business activity in London, which creates a need for more housing, more social infrastructure, more transport, and more land use that simply cannot be satisfied quickly enough, if at all. Rapid growth in population, driven partly by immigration, is one cause that needs to be tackled if this imbalance is ever to be rectified. And a policy to redistribute economic activity more broadly across the country would make a lot of sense surely.

One little reported item in Mrs May’s speech was the announcement that the Government is to make a presumption in favour of organ donation legal. So instead of an “opt-in” system, you will be required to “opt-out” if you do not wish to become an organ donor.

As a kidney transplant patient myself, I view this as a positive step forward to increase the number of donations. As Mrs May said in her speech, 500 people died last year because of a lack of suitable donors. That particulary affects heart donations, but even kidney disease patients have a much shorter life expectancy on dialysis as against having a transplant. The economics are that transplants are cheaper than dialysis, and the quality of life much improved. So I hope this measure will go through unimpeded.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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