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UK Investment Markets: Weekly Update – August 12th 2019

Forget Project Fear, It’s all in the Numbers

It seems as though any negative post-Brexit outlook is immediately dismissed as ‘Project Fear’. However, a raft of figures emerging from the UK shows exactly what is going on with the economy as we hurtle ever-closer to a no-deal Brexit.

Looking first at the trade surplus for June, it would appear that the country is in positive territory for the first time since February 2011. This is largely driven by an excruciatingly weak pound which has driven export growth since October 2016. The sectors leading this charge in British exports are chemicals, machinery and transport equipment although this growth is not likely to boost profits due to the fact manufacturers are operating on much tighter margins in the current climate. Imports fell for the third consecutive month as a result of a weak pound making EU imports prohibitively expensive.

Investor Confidence at an All-Time Low

It is always vital for a country to attract investment both from domestic and foreign sources as it stimulates economic growth. This is extremely concerning in the run-up to a potential no-deal Brexit as investors show ever-decreasing confidence in the UK as a viable growth opportunity. Taking a quote from the movie All the President’s Men, if you ‘follow the money’, alarm bells should be striking as to why professional investors are pulling their capital out of the UK. In fact, that’s a pretty reliable way of sourcing investment value too.

Bank of England Warns Of One In Three Chance of Brexit Recession

So, ignoring cries of “Project Fear”, if we look again at the outlook according to Mark Carney and the Bank of England, what he says makes perfect sense.

According to the Bank’s warnings, Britain has a one in three chance of plunging into recession at the start of next year as the heightened uncertainty over Brexit drags down the economy. The above stats show this is already happening.

The central bank also said business investment was stalling, with trade tensions and slowing demand in the global economy also having an impact on UK growth. Again, referring to the above we can see that this is the case.

The Bank of England also said Britain has a 33% probability of falling into recession by the end of the first quarter of 2020 even if a Brexit deal is reached, because of the impact from heightened uncertainty. This is not an unreasonable claim to make.

Mark Carney, the Bank’s governor, said that Britain crashing out would cause an “instantaneous shock” to the economy that would be tough for the central bank to respond to. He warned the pound would be sold off sharply, inflation would rise, while GDP growth would slow further.

“We will do what we can in those circumstances to support jobs and activity. But there are limits to what we can do,” Carney said.

The intervention from Threadneedle Street came as the pound continued to slide on the international currency markets, as the chance of Britain crashing out of the EU at the end of October rises. Boris Johnson has ramped up the rhetoric to warn that Britain would be prepared to walk out of the EU without a deal, sending sterling tumbling to the lowest levels in more than two years.

Inability to Manage Market Expectations

Market expectations of a no-deal Brexit have risen sharply since Johnson has come to power, with the probability rising to almost 40%, up from about 15% in April. Carney said the central bank made forecasts based on official government policy, even if the financial markets were now indicating the chance of no deal has risen. While the Bank has not published a forecast for no deal, he warned it would be an “unwelcome development” for Britain and the rest of the world.

Although Johnson still has an ambition to strike a new deal with Brussels, several members of the government, including Michael Gove have suggested that no deal is starting to become an “operating assumption”. The EU has also indicated a lack of willingness to reopen Theresa May’s withdrawal agreement for negotiation.

How to Keep your Savings and Investments Safe Whatever Happens

Investor Live was founded with the mission of providing information and resources to help normal people save and invest their money wisely. Retail investors are fortunate to have the opportunity to invest in big assets without taking all the risk on themselves as sole owners.

We always recommend products that give you fixed returns which is never more important than when financial markets are shaky. Although you won’t earn the returns you will for a high-risk opportunity, you at least know you are not likely to lose all your money.

Preferably, you want to keep your money locked into an instrument that is going to give you exactly what you calculate it to when you invest your money. Products with terms of around 12-24 months that have underlying real estate assets are the best bet for keeping your hard-earned capital as safe as possible as the post-Brexit dust settles, (God willing).

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.