UK's allure takes a beating

Friday, 17th May 2019 13:12 - by Shant

For a number of weeks now I have chosen to avoid the dreaded Brexit word, not least of all because readers are sick to the back teeth of the mess that has developed under a parliament fractured into so many divisions.  While the withdrawal agreement has its flaws, it would have taken the UK to the next stage of negotiations with the EU, but after three failed attempts, we are left slowly eroding all the options available. 

Cross-party talks (we hear) this morning have proven fruitless, though many saw this coming.  With both sides holding steadfast in their red lines and reluctant to split their respective parties any further, the rigidity in demand from both sides offered little optimism to hang your hat on and this morning's developments have confirmed this.  

Not surprisingly, the Brexit barometer which is Pound Sterling has taken a beating this week, as speculators and real money managers react to the aggregate possibility of outcomes.  Now that Theresa May has agreed to stand down after her deal is voted on next month, the prospect for a pro-Brexit leader have risen - Boris Johnson currently with the shortest odds - raises the realistic prospect of a no deal outcome.  Even though parliament has voted against this, this is still the current default position, albeit with the deadline now pushed out to October 31 at the latest.  The PM still hopes to get a deal done by the end of next month, in order to leave by the end of July.  Again, hope is all there is there at the moment and it's not looking good.  

So much for the early year optimism that some deal would have been agreed.  I must admit, the level of discord has left me dumbfounded and no doubt the rest of the world.  One of the key draws of the UK - along with the currency of the English (international) language - is its sound political backbone.  This has been severely damaged and will take years to repair.  Naturally, the status as a gateway to Europe has also been eroded, with the effects felt through a number of high profile names withdrawing projects and plants in the UK  - Nissan and Honda just some to note.  Thankfully, the economy has been performing relatively well - certainly against that of Europe.  Given the service industry represents over 70% of the economy, it is no surprise that the UK has overshadowed Germany in recent times, with exporters globally feeling the pinch of aggregate demand - exacerbated by trade tensions no less.  Wage growth and employment levels are strong, and to the point where the BoE feel ready to tighten monetary policy but for the not so small matter of agreeing on an exit deal with Europe.  

However, the stresses and strains will start taking their toll on domestic corporates.  Consistent calls for certainty - and a distinct lack thereof - are a clear cry for help, though ideology is still winning out.  Thomas Cook has been in the news this week with uncertainty said to have hit demand, though its half-year loss of over £1.45bln was largely down to the sharp write-down of the MyTravel Group.  Easyjet bookings have also been hit, with Tui also feeling the heat from deferred interest to plan holidays abroad.  

As already mentioned on this site, Staffline, a major recruiter has been hit very hard today in profit warnings - again, all down to the unknown waters that is Brexit.  Temporary employment revenue has been hit by some of the pre-emptive exodus from the UK, though this should not have come as a surprise, with staff shortages in the NHS having been a topic of debate within the House of Commons in recent months and weeks. Shares here dumped over 50% on the profit warning.  Larger recruitment agencies with a broader coverage such as Hays, have been less affected in more recent times, but have still, and may yet start feeling the pressure from both supply and demand side forces.  

These examples are somewhat masked by the broader indices, which have been broadly resilient, though alongside that of the Wall Street, Europe and Asia.  The weaker Pound has also been a key positive for the UK with its mix of UK companies receiving Dollar revenues.  Even so, judging by today's price action in UK stocks, it seems investors cannot even count on the usual defensive stocks including pharmaceuticals - Hikma, Glaxo and AstraZeneca all in the red by varying degrees - as the threat of a hard line Brexit has been revived by events this week.  One senses that this is going to get worse before it gets better, though if we throw a general election into the mix, then we really are in for the long haul!

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.