UK plc: Back from the cliff edge?

ii Fiight Club: On 23rd January 2020, interactive investor and Merian Global Investors hosted a joint event at Shakespeare’s Globe, where Merian’s head of UK equities, Richard Buxton, and monetary metals expert, Ned Naylor-Leyland, debated the outlook for the year ahead. Here, Richard provides a recap on some of his latest thinking. 

Richard Buxton, head of UK equities and manager, Merian UK Alpha Fund

Whichever side of the EU membership debate you supported in 2016, one thing the vast majority of people seem able to agree on is the “other-worldly” quality that has characterised our national and political discourse in recent years. 

Unable to work out how the situation might resolve itself, this was missed neither by UK domestic equity investors, nor those based overseas, who pulled billions of pounds out of the UK stock market over a period of several years. For someone who spends a large proportion of his waking hours thinking about the prospects of UK businesses, it has been a rather disheartening time. 

That being said, it was not all gloom and doom, and I took considerable comfort from observing canny international investors swooping on superb quality UK assets at unreasonably low valuations; the recent purchase by Li Ka-Shing – one of Hong Kong’s richest men – of the brewing giant Greene King (LSE:GNK) is an obvious example. 

The result of December’s general election – whether you are a fan of the Tories or not – was indisputably one that the financial markets were happy with. It was unsurprising to see the pound rally sharply as the result became clear, and the prospect of a government led by Jeremy Corbyn faded from view. 

But then something changed again; just as expectations that Boris Johnson’s huge parliamentary majority would enable him to reduce the bellicose rhetoric that had characterised campaign language for what sometimes felt like a short eternity, and strike a more conciliatory tone, it was almost as though the government decided that now was the time to double down. All of a sudden, talk of a potential Brexit “cliff edge” seemed to be back on the table, the date simply shifted to 31st December 2020. 

My own view is that, ultimately, cooler heads will prevail and that, behind closed doors, UK decision-makers are not seriously considering arriving at the end of the transition period with no further plans or measures in place, given widespread recognition of the economic damage that would ensue. The Chancellor’s announcement at Davos that the government’s “first priority is getting an agreement with the EU” would seem to lend credibility to this argument. 

How the detail and results of the negotiations will emerge may ultimately have more to do with how ministers perceive that the debate will play out in the press than anything else. Still though, having a functioning government does strengthen the UK’s negotiating hand; a series of compromises by both sides (perhaps, for example, a fisheries deal in exchange for favourable access to EU markets for the UK’s financial services sector) would seem to be a likely, albeit untidy, outcome. 

Regardless of the catchy and much-repeated soundbite regarding getting Brexit “done,” most realists recognise that this is just the start of a multi-year process. One welcome fillip of the dawning realisation that Brexit won’t simply be “done” from one arbitrary date to the next, is that if the market decides this is going to be a long, drawn-out and iterative exercise, with no credible risk of a cliff edge exit, then its relevance to markets and significant parts of the economy could fade quite quickly. Such a result could be a real boon to UK equity investors, even if the route to this point has been long-winded and tortuous. Watch this space. 

About Richard Buxton:

Richard joined the company as head of UK equities in 2013. In early 2019, he announced his intention to step down from the CEO role (which he took on in 2015) and will remain with the business as head of UK equities. Richard was previously at Schroders, where he managed the Schroder UK Alpha Plus Fund for over 10 years. Prior to Schroders he spent more than a decade at Baring Asset Management, having commenced his investment career in 1985 at Brown Shipley Asset Management. Richard was awarded the Outstanding Contribution to the Industry honour at the Morningstar OBSR Awards in 2012 and has a degree in English language and literature from the University of Oxford.

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Past performance is not a guide to future performance and may not be repeated.  Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested.  Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.