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Pandora's Box of UK Politics

Janurary 2018

Investing in developed markets rarely involves high levels of political risk; over the long term markets are driven by the path of corporate earnings. However, today UK investors need to contend with some major unknowns, the outcomes of which may well significantly impact returns. 

- The separation cost of Brexit could exceed €100bn and it could take years to see any economic advantage

  • The date for balancing the books has been pushed back to the back end of next decade.
  • The UK political situation remains extremely fragile

The EU and UK have agreed that the first stage of the Brexit negotiations have been completed and talks can now proceed to discussions about trade. This has come at quite a cost for the UK Exchequer. The €50bn figure banded about is rather adjacent to the higher end estimates of what the divorce would cost. So much for the negotiating skills of Davis and May. On a gross basis, the separation cost will probably exceed €100bn, which puts the £350m per week on Boris's bus into perspective. It will take years before the NHS begins to see its bounty. Brexiteers are right to be thinking how the hell the nation committed itself to such huge sums so surreptitiously. 

Fortunately for the NHS, Hammond's November budget contained more immediate relief, though this is scarcely a surprise given the Tories political predicament. We should expect more bungs to squealing constituents over the life of this Parliament. The downgrade in the OBR's growth forecasts has severely crimped the Chancellor's wriggle room that he had previously engineered for himself. I wrote last year that I considered the UK growth forecasts optimistic. The date for balancing the books has been pushed back to the back end of next decade. Let us not forget that George Osborne in his first budget in 2010 had promised to bring it into balance by 2016. The public finances are only part way on their long uphill journey. 

Any mother knows the power of fables; an elf on the shelf (apparently, it's a Santa surveillance operative) or tales of trolls under bridges have all been employed to keep her brood from straying. Fortunately for Theresa May, she has an ogre extraordinaire to help keep her MPs in check. Regrettably, for investors Jeremy Corbyn is no fantasy. In general, I avoid taking political stances (my grouch on Trump is more about his personal deportment), however, Corbyn is an unapologetic anti-capitalist. Worryingly, he appears moderate when compared to some on his front bench. 

This fragile government could collapse at any moment. Already the cabinet is stuffed with has-beens and never-wasers in an attempt to satisfy every faction within the party. Competency no longer seems criteria for high office and the list of blunders will mount. Misconduct is a further worry. It sounds fanciful to suggest something such as bottom pinching could be enough to unseat a government, but it might. We need to keep a constant eye on political matters. Paddy Power is offering a 50/50 odds on a General Election sometime in 2018 and 5/2 in the following year! 

Thankfully at 4/1 against, Corbyn isn't attracting much punter interest as the next PM. This despite Labour's slender lead in recent polls. The thought of a Corbyn Premiership is not a pleasant one, and the All Share is acutely vulnerable to his promised hike in corporation tax. We live in hope that the electorate will see sense and, or the Tory's next election campaign won't be quite as inept as the last. However, as HL Mencken said, no one ever lost money underestimating the average intelligence of the general public. 

The UK is trading at a discount to global markets. Deservedly so. 

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