Broomer's Blog

From the category archives: UK


Thoughts on Election Results

As you will be aware, the Conservative Party won the election by a large majority. Sterling has strengthened materially in the foreign exchange markets this morning and the UK stock market has risen. Investors are relieved that Corbyn and his Marxist agenda has been roundly rejected by the electorate. Markets also benefited from the overnight news that the US appears close to agreeing a 'phase one' trade agreement with China, stock markets in the Far East and in Europe have also risen this morning.

At last, the UK has a strong government with a clear mandate to get Brexit done. We expect the UK to leave the EU by 31st January, though the transitionary period will probably have to be extended beyond December 2020. We, and other investors, are now considering whether this brings sufficient certainty to justify lifting exposures to UK assets.

Brexit Survey

Ahead of the outcome of the Brexit negotiations, Square Mile are reviewing UK equity options in our Managed Portfolio Service and considering funds sensitivity to the potential outcomes.

Accordingly, we surveyed the managers of the 48 UK equity funds with a Square Mile fund rating (an indication of the best fund managers in the sector) to investigate their opinions of how Brexit might impact the market and their portfolios. The questions and responses are as follows:

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Outlook June 2018

Geopolitical events invariably cast a shadow over markets, but it is relatively rare for them to manifest into something that affects the economic cycle. Events that alter the secular trend are even more exceptional but this is not to say that they don't happen. Thatcher's deregulation drive of the 1980s and FDR's 'New Deal' are examples and we suspect that Trumponomics may be another. Labelling Trump's policies as Trumponomics is unhelpful since it hints of an underpinning philosophy, which is entirely absent. Political direction rests with a demagogue.

For decades, economies and markets have quietly benefited from freer movement of goods, capital and labour. This is a trend that has not only been halted but sent into reverse. The direct impact of $20bn of tariff costs on a $20tr economy will be trivial but adds unwelcome grit to the running of the system. It will be interesting to observe voters' reaction as the repercussions are felt. Already, mid-Western soybean growers are grumbling as soon might the blue collar shoppers of Walmart where 70-80% of goods are sourced from China.

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Pedalling Harder Just as the Brakes are Being Applied

My brother-in-law is a cycling fanatic. I asked him the other day if there is a technical term to describe pedalling while the brakes are being applied. He thought about this for a moment, before suggesting 'stupidity'.

It is almost 10 years since the financial crisis and the long drawn out recovery finally appears to be on a self-sustaining path. Monetary policy is gradually being tightened in the US, emergency rate cuts are being reversed in the UK and the ECB is dialling down its QE programme. With US unemployment just hovering above 4%, many monetary hawks will be thinking this is not before time.

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Pandora’s Box of UK Politics

Investing in developed markets rarely involves high levels of political risk; over the long term markets are driven by the path of corporate earnings. However, today UK investors need to contend with some major unknowns, the outcomes of which may well significantly impact returns.

The EU and UK have agreed that the first stage of the Brexit negotiations have been completed and talks can now proceed to discussions about trade. This has come at quite a cost for the UK Exchequer. The €50bn figure banded about is rather adjacent to the higher end estimates of what the divorce would cost. So much for the negotiating skills of Davis and May. On a gross basis, the separation cost will probably exceed €100bn, which puts the £350m per week on Boris's bus into perspective. It will take years before the NHS begins to see its bounty. Brexiters are right to be thinking how the hell the nation committed itself to such huge sums so surreptitiously.

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A Thought Worthy of Halloween

Successive UK governments have been driving down corporation tax, Alistair Darling started the trend by reducing the rate by 2%, to 28%, in 2008 and George Osborne was a keen advocate of lower corporation tax during his tenure. Since when the rate has been progressively cut to 19%. This has been sold to the electorate as showing the world that the "UK is open for business".

Interestingly, corporation tax revenues have surged to all time records and while it might be tempting to suggest this is something to do with the voodoo economics behind the Laffer Curve, there are probably more important factors at work. Corporate profitability is currently high with the tax take swelled by the Brexit induced fall in corporate investment and foreign income increasing in value.

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A Wellard Brexit?

Some 9 months since the vote, we are gradually gaining a little clarity about the nature of Brexit. Despite court challenges, May's government triggered Article 50 in March and the process is formally underway. There are number of large stumbling blocks between the EU and the UK positions. As Juncker is reported as saying to Merkel over the weekend, May is 'living in a different galaxy' and that he is now "ten times more skeptical than before".

The two main contentious issues are the powers of the European Court of Justice and the free movement of labour. There may be some sort of compromise possible on the former, but the latter appears intractable. May would like free trade without uncontrolled immigration, the EU would like not. The UK as a result seems destined to leave the single market and take a clean break from Europe. In May's words, "No deal is better than a bad deal". A diamond tipped hard Brexit seems to be the likely outcome.

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May calls a snap election

After months of speculation about an early election in May, and perhaps thankfully for headline writers, May has surprised everyone by calling one in June. At first sight financial markets took fright at this news with the FTSE 100 falling by over 2%, but this was actually a reflection of the moves in the foreign currency markets where sterling shot up by 2% versus the dollar. With many of the UK’s largest listed companies deriving a large proportion of their revenues from abroad, a stronger currency has a negative effect on company profits. Political pundits and financial markets seem confident that a larger Conservative majority will result. If by some off chance Corbyn does prevail, investors should brace themselves for falls in both the stockmarket and the pound. Assuming the election goes as intended, it could ease May’s hand in her negotiations with the EU. We still don’t know if May favours a hard Brexit, which would be bad news for UK asset prices, or a soft Brexit which would b ...

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Financial Heroin

If I have a house fire and my wallet, containing £100 in cash, is destroyed, in theory, the Bank of England would be obliged to reissue the £100 in cash to me if I could present sufficient proof of the notes’ loss and their serial numbers. Is this in any way inflationary? I think it would be very difficult to argue that it is. 

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Fiscal Happiness or Bleak House?

"My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Charles Dickens, 'David Copperfield' 

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