News readers following the political drama of Brexit are either bored by now, or confused or increasingly agitated by the languidness and sheer incompetence of Britain’s political elites.
They are bored because it is a story without logic and a plot progressing in circles, like a play written by Samuel Beckett. The painful tension of nothingness is not everyone’s cup of tea.
They are confused because a seemingly simple question put forward to the British electorate by flippant public-school boys turned out to be not so simple after all. Those tasked professionally to answer it, the haughty, self-serving ruling classes, turned out to be ignorant beyond belief. This, not surprisingly, does include the Labour Opposition in shocking sameness.
With every day passing, businesses and voters are getting angrier. Soon the British will heap abuse on all and resort to throwing bottles on the football field of politics. “Keep calm and carry on” as a stance does not make much sense without clear purpose.
For us retail investors it poses the question of whether shares traded on the London Stock Exchange, depressed in value as they are, represent a rare buying opportunity. “Buy cheap and sell expensive,” goes the investor’s adage, after all. It is a view put forward now increasingly by financial journalists, mostly those sympathetic to Brexit.
If one dismisses the long-term implications of a divorce from the biggest trading block on earth as temporary, this is only logical. Things can only go up again, they say, and share the insouciance of Boris Johnson for whom the worries about the Irish border, dreaded deficits in labour markets and stock piling of manufacturers is nothing but hysteria – of the same category as the Millennium Bug.
Interestingly, many cheerleaders of Brexit have hedged their bets, though. Like the top-hatted Brexit-MP Jacob Rees-Mogg, who providentially transferred his fund management company to the EU; Arron Banks, founding member, main sponsor of the Leave.EU campaign and happy-to-be EU citizen, thought it prudent to better prepare and clandestinely bought one of our golden Malta passports; James Dyson, EU-hater and one of the very few UK industrialists to shout for Brexit, had moved his manufacturing base to Malaysia and Singapore a long time ago already.
Their insincerity is shocking, but no argument against an opportunistic UK investment spree. Could it not be that UK builders, unburdened by their better trained and cheaper European competitors, will be able for once to make a financial killing? Is it unthinkable that shoddy eateries like JD Wetherspoon will thrive again and even Little Chef will be resurrected once demanding European customers have left? Will the spook of German discounters like Aldi and Lidl not thankfully disappear to make space for higher margins at shoddy outlets of Morrison, Sainsbury or Safeway?
We should approach the UK stock market with prudence. It would be misguided to sell all investments now in the fear of Armageddon
I have deliberately chosen examples of companies focusing on the domestic market. The LSE as represented by the FTSE index contains to a large extent corporations whose international business will be largely unaffected by Brexit. Globally operating, listed mining or energy companies for instance – and there are many of them moving the London stock market. Such corporations are more impacted by the ups and downs of world trade and global business cycles than the woes of the UK. As the economy will deteriorate – and even Brexiters acknowledge a possible loss of growth of one to two per cent of GDP for quite a few painful years – the British pound will lose in value, thereby boosting the nominal profits they make in other currencies. As a rule of thumb, less competition means higher margins for locally operating firms. The same holds true for imposed import tariffs and diverging industrial standards, which are a form of hidden tariffs. Domestic clearing banks like Lloyds and firms protected by border hurdles will tangentially fare better than those depending on export to the EU. Without recourse to EU regulations even carmakers will be able to once again fleece local buyers – at least for the limited time city dwellers will still be willing to buy their cars, that is.
Mobile phone companies will be happy to reintroduce steep UK roaming charges. Supermarkets, medical services and drug companies will fare splendidly as their customers do not have the flexibility to refrain from buying. (For Labour this is all hogwash, of course. Because there will be no evil Brussels bureaucrats standing in their way to renationalise whatever is prone to fail.)
This brings me to the question of timing. Propagandists of the Great Buying Opportunity are certainly right to point out that the pound has dropped in value and share prices of UK companies are visibly depressed. But so are their European peers. It is impossible to work out if valuations are down because of a perhaps falsely exaggerated Brexit drama, as Leavers would have it, or rather because world trade has become increasingly brittle with the Chinese economy clearly in retreat, the US facing a prolonged government shutdown and a trade war far from abating. We experience a time where some of our chips should be taken off the table. To bet the bank on an outcome which is entirely unpredictable is unwise. The gambling Earl of Sandwich, inventor of the eponymous snack, should not be our role model.
Another not less important point is that valuations are not down for nothing, yet in all probability not reflecting the looming chaos in its entirety. Glimmers of hope, whenever the risks of crashing out of the EU without a meaningful arrangement seem lessened, hardly move the needle. A few ticks up when things look better, a few ticks down when British politicians remind us how self-centred and bumptious they are.
It is an illustration of investors standing on the sidelines waiting for tail risks to materialise. Investors are hesitant to give their verdict on the final results. They are unwilling to commit to a situation where the outcome is completely unpredictable. It is one thing to waste a few euros on a lottery ticket and quite another to bet the house in the hope that a bunch of blustered buffoons will act responsibly.
My hunch is that things will get worse before they get better. I have advised my oldest daughter and her husband, who are setting up a new household now in London once their firstborn can travel, to rent for a couple of years rather than to buy. Home loans are more burdensome now with banks and FSA hedging for all eventualities, down payments substantial, and the risk to end up with negative equity – the house being worth less than they will have paid for – significant.
Yet if property prices will deteriorate as much as real estate agencies now increasingly fear, this could soon be a good buying opportunity. Perhaps not; perhaps prices will continue to creep upwards. But this does not matter. So will their income. And in the meantime they can enjoy a life in comfort, unburdened by a killer mortgage.
We should approach the UK stock market with similar prudence. It would be misguided to sell all investments now in the fear of Armageddon. There are quite a few solid companies which will not go under and even with their share price subdued will return a decent dividend yield. We may suffer paper losses, not a wipeout.
The reality of investing is that nobody will ever get the timing right. Over the last 20 years only 20 days made the difference between success and failure. Not having been invested during these days meant having missed out on the biggest stock market gains, regardless of the losses such investments had suffered when the internet bubble burst in 2000 and when the markets crashed in 2008.
Yet to think that the depressing outlook on the economic prospects of the UK today was nothing but the dawn of a new gold rush is wishful thinking. Let’s keep our powder dry.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com