Chickens are coming home to roost in the UK economy with inflation rising and political turmoil. What does it mean for UK assets?
- An uncertain election and rising inflation spells bad news for consumer confidence
- At the same time, global protectionism may dent the UK’s economic strength
- UK stock prices still may few concessions to the weakened environment
The consequences of the vote to leave the European Union, initially dismissed as the pessimistic bleating of ‘Remoaners’, are now becoming increasingly clear, at the same time as political turmoil is denting confidence.
While some may still have faith in the long-term strength of the UK outside the EU, few can argue that the shorter-term impact has been chaotic. Consumer pockets are feeling the pinch as the weak pound pushes inflation higher. At 2.9%, the inflation rate is now the highest it has been since June 2013, in spite of falling fuel costs.
It is difficult to paint an optimistic picture from here. Not only does the UK need to navigate the complexities of Brexit, and a fragile political situation, there are also global forces to battle. A study by The Atlantic Council and Zurich Insurance has found the UK economy could shrink by 3.7% by 2035 if global protectionism gains traction.
Perhaps the only encouraging aspect is that the pound has already fallen a long way. Sterling proved relatively resilient in the wake of the General Election and remains at similar levels to those seen since the Referendum. It seems that, for the UK at least, uncertainty is already baked into currency prices.
UK stock markets, in contrast, continue to move merrily higher, pushed by a strengthening global economy and ongoing optimism in the US. There may be greater risk here than in sterling, not because UK stock markets have much to do with the strength or otherwise of the UK economy, but because investors seem to have suspended their disbelief.
Will there come a time to reinvest in UK assets? As the UK stock market doesn’t appear to reflect a lot of risk on the economy, there are no bargains yet. There may be some bounce on the currency, but with no resolution to the UK’s political problems likely, it is difficult to see what would drive it higher.
In short, it is a mess and UK assets still look vulnerable to political problems. If Theresa May can’t govern, and there is another election, a weak Far Left government may be a real possibility. Investors are unlikely to flock to UK shores in that eventuality.