The MAM Blog – Where now

Stuart Ralph – Investment Manager

The votes were counted, MPs sworn in, Queen’s speech delivered and following the Christmas recess, MPs have returned from their constituencies – so what now for investors and the wider electorate?

The caution expressed by investors ahead of the election has given way to a general improvement of sentiment, where domestically focused areas have performed well, driven by an immediate and potentially longer term refocus on UK domestic policy. Aided by a significant majority, the new Government will take the UK out of the EU by the 31st of January 2020, whereupon the country will find itself in a transition period while the more important and longer term future relationship between the UK and EU will be negotiated.

With the UK very firmly placed at the “end of the beginning”, from a fundamental and political perspective the Treasury and Chancellor will have welcomed news that the UK economy narrowly avoided entering a technical recession in the third quarter, with GDP growth of 0.4% q-o-q. The tentative improvement will underpin a narrative that the UK economy is coping with Brexit uncertainty.

For investors, despite the recent improvement, the PE ratio of the UK remains relatively low against many of its equity market peers. The extent to which the UK equity market can make further progress will, in part, be determined by wider global economic developments, including US / China relations and domestic issues surrounding future UK / EU trade negotiations and currency strength.

Source: Refinitive Datastream – 14/01/2020

Elsewhere, in the real world, the electorate will be expecting change and a Government willing and able to make different choices from those of the past. The Chancellor’s first budget will be critical in signalling and assessing the commitment of the Government to deliver on its manifesto, and turn promises to “level up” the economy into credible policy choices and tangible projects. The current imbalance between UK regions shines a light on previous Governments’ inaction to develop a fully thought out industrial strategy.

Critical to a successful rebalancing of the economy will be the Government’s ability to think differently; set aside sacred-cows and demonstrate a clear and unambiguous commitment to the UK regions, the electorate, employers and private sector. The budget could provide the first real evidence of this commitment, specifically in relation to the choices made and the balance between investment and current spending.

In this post credit crisis era, the UK’s already loose macroeconomic policy has been driven by accommodative monetary policy and over the months and years ahead, fiscal policy will play a more important part of the overall macroeconomic policy employed by Government to address the output gap of the economy.

The chart below is sourced from Refinitiv Datastream / Fathom Consulting. The Macroeconomic Policy Indicator weights together fiscal and monetary policy to give an overall indicator of the macroeconomic policy stance.

A positive score (below the zero line) implies loose macroeconomic policy and a negative score (above the line) implies that it is tight.

A value of one (below the zero line), implies that macroeconomic policy is sufficiently loose to stimulate growth in demand by 1% point relative to the growth in supply.

With Manifesto commitments, investors and the wider electorate will look towards the budget for the first signs of exactly how supportive the macroeconomic policy stance will be over 2020 and beyond, as both Monetary and Fiscal policy pull in the same direction.

Source: Refinitive Datastream / Fathom Consulting – 14/01/2020