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UK Investment Markets: Weekly Update – February 25th 2019

Brexit UK exit from EU negotiation process concept with Union Jack and European Union flag on a clock 3D illustration.

Heading into the last week of February, the UK is groaning at the prospect of more delays on decisive action on Brexit. This follows the hasty announcement made by Theresa May as she landed in Egypt, (obviously not on EU-related business), that there would be no ‘meaningful’ vote this week despite having hinted that it was on the agenda.

Of course, this fuels claims from just about everyone in Parliament that May is kicking the can down the road to pressurize support for her withdrawal agreement which she has been unable to renegotiate. Nevertheless, MPs will be voting on the two key issues of delaying Article 50 and holding a second referendum in the House of Commons on Wednesday which the government has pre-empted by stating ahead of the vote that it won’t be meaningful anyway.

For the majority of the British people it is fast becoming obvious that nothing very meaningful takes place in Parliament per se!

Our Economy’s Strong on its Own They Cry!

Well yes, if you consider the data that is published for the world to see it would certainly appear that the UK is not fairing too badly considering the chaos the country’s in. A weak euro is supporting the pound on the continent and although it still has some way to go to recover traction after the 2016 referendum, it could be a whole lot worse. Inflation is the lowest it has been for two years at 1.9% and unemployment is constant at 4% which is a record for more than 40 years.

As an analyst however, these indicators set alarm bells ringing and if you’re in the know you soon realise that there’s something very wrong with the numbers. They don’t stack up to the extent that there’s an element of smoke and mirrors that’s creating a series of quite alarming and very mixed signals of an economy on the verge of serious problems.

The Inverted Correlation between Unemployment and Inflation

To illustrate what I mean about how we are fed information affects our perception of the British economy; we’ll take a look at the well-known relationship between unemployment and inflation. In simple terms, when unemployment is low, inflation is higher and vice versa. This is because when more people are employed, they spend more money, which in turn is reflected in higher prices for goods and services.

According to figure one below, unemployment has almost halved from around 8.5% in 2012 to 4% today. Taking a look at the inflation chart, figure two, you can see that inflation also fell quite sharply in 2012 to almost hit deflation in 2015 before correcting to the reasonable level of 1.8% we see now. Whereas the lines of both charts should be moving in completely opposite directions if the widely accepted model of correlation between employment and inflation is used, they appear to be operating under completely separate influences.

Figure One

Figure Two

So what’s Going On?

You only need to read the news the find out the real truth to the state of the British economy. Although there are apparently more people in employment than there have been for over 40 years, more than 2.5% of them are working on zero hours contracts. Zero hours contracts were introduced in 2000 and have been criticized widely ever since. They are basically contracts that no-one in their right mind would choose to sign as they offer nothing – literally nothing. There is no guarantee of having any working hours on a given week, hence their name. These are ‘employment’ contracts that are completely spurious, keeping almost a million Britons on the breadline and feeding their families from food banks.

As with the rates of inflation and unemployment, the number of people employed on zero hours contracts changed significantly in 2012-2013, when the percentage of people on them more than doubled from 0.8% to 1.9%. Because of the worthlessness of zero hours contracts, although more people are technically in work, they don’t necessarily have any more money to spend which is reflected by consistently low inflation.

Figure Three

Level and rate of people aged 16+ on zero-hours contracts
Year In employment on a zero-hours contract (thousands) Percentage of people in employment on a zero-hours contract
2000 225 0.8
2001 176 0.6
2002 156 0.6
2003 124 0.4
2004 108 0.4
2005 119 0.4
2006 147 0.5
2007 166 0.6
2008 143 0.5
2009 189 0.7
2010 168 0.6
2011 190 0.6
2012 252 0.8
2013 585 1.9
2014 699 2.3
2015 804 2.5
2016 907 2.8
2017 902 2.8
2018 844 2.6
Source: ONS Labour Force Survey

CHOOSING THE SAFEST OPTIONS FOR YOUR INVESTMENTS AND SAVINGS

The economic climate in the UK doesn’t bear thinking about even for weather-worn analysts and there’s no prospect of stability on the horizon. The words ‘strong and stable’ resonate around our heads after Theresa May repeated them so frequently when describing how Britain needed to be led through its divorce from the EU. However, few things are strong and stable and so we have to consider our investment moves as if we’re heading into the unknown – which we are.

Fixed income opportunities that are backed by tangible assets are the safest possible option for your investment strategy at the current time. You want to be sure you’ll be receiving a determined amount back for your investment and that there’s something underpinning it of significant value. One of the things to consider is not how much the asset you’re invested in is worth but how much of it is owned by the issuer behind the investment opportunity.

This is crucial, particularly at the current time because any leveraging costs are likely to increase in a volatile economy, making borrowing too expensive even for the deepest pockets. One area of British business that I particularly like from an investment point of view is hotels and hospitality. One of the main reasons is because the sector is performing with real strength where others are failing in amongst the uncertainty.

Investment over the short-term is always a better idea when markets are volatile and there are a few opportunities to enter the British hotel and hospitality sector for 1- to 2-year terms. One such opportunity comes from Liverpool-based hotelier Signature Living which has a proprietary investment vehicle called a Secured Partnership Investment (SPI). You can find out more about how to invest in this award-winning hotel brand that is rapidly expanding its portfolio of heritage hotels by contacting Investor Live.

About the Author

Amanda Wright is a former risk analyst at Bankers Trust, with specific experience of mergers & acquisitions and corporate finance. As a contributor to Investor Live, Amanda provides valuable insights into the technicalities of fundamental analysis in a way that is easy to understand, to provide retail investors with the tools to make considered investment choices.