For the better part of the past year, Ken Fisher (founder of Fisher Investments Worldwide) has preached a simple message to readers of his global market commentary: The sooner Brexit happens, the better off the UK’s economy and equity markets will be. Perhaps counter-intuitively, the recent run of dreary economic data helps explain why.
As a general rule, equity markets hate rising uncertainty and love falling uncertainty. Elevated uncertainty discourages risk-taking, which harms investment. Think like a business leader—one of Ken Fisher’s favourite tactics to assess the economic impact of policy changes and this becomes clear. Many business projects are long-term in nature. The payoff might not come for years down the line. That inherently breeds uncertainty to an extent. However, being confident in regulations, taxation, tariffs and other costs staying relatively predictable years down the line adds some clarity, facilitating planning. If the rules appear to be stable, that can add confidence and encourage investment. But if the rules have a high likelihood of change, it encourages businesses to wait for clarity. After all, how can you determine whether an endeavour is likely to be profitable if you don’t know what the future costs and restrictions will be? Absent clarity, you may not even know something as simple as the best place to open a new factory, office or warehouse.
In our view, the UK’s recent economic wobbles suggest uncertainty is indeed taking a toll. Business investment has fallen in five of the past six quarters through Q2 2019.[i] Its lone positive quarter—Q1 2019—occurred as survey-based indicators from IHS Markit showed businesses were stockpiling in anticipation of a no-deal Brexit potentially occurring on 29 March (the initial Brexit due date). We think it is rather telling that the one quarter business investment increased is the one quarter when a significant portion of spending was short-term in nature, not long-term. Meanwhile, as the new 31 October Brexit deadline looms—and without clarity on what Brexit will look like or whether it will be delayed again—business surveys again reveal companies are in wait-and-see mode. America’s National Bureau of Economic Research aimed to tally the full impact in a recent report, concluding business investment over the past three years was 11pc smaller than it would have been had Britain voted to remain in the EU.[ii] Now, we aren’t saying that remain was a superior option economically—not our place to opine on that. And we are always sceptical of such calculations, as they require a great deal of assumptions. But, to us, its conclusions are at least illustrative of the potential overhang from uncertainty about how the post-Brexit landscape will look.
So why would Ken Fisher say Brexit is bullish? In our view, it is because the eventuality of Brexit itself would dispel that uncertainty. In other words, it was the lack of clarity on future trade policy, and similar matters that made investment difficult. Once businesses know the rules, they can adapt—even if those rules aren’t what businesses would prefer. Whether Britain is in or out of the EU, companies will still have an incentive to invest and grow. Knowing the rules will enable them to know simple things like where to expand. Can they easily sell into the EU from the UK? Or should they beef up production facilities in both places? Will the UK be able to sign bespoke trade deals with America and other nations, potentially expanding transatlantic opportunities? Or will it remain tethered to EU trade policy? Again, either is workable for most businesses. But until they know, we suspect the risks of launching new projects are too great.
As for equity markets, one general trend we have observed is that if reality exceeds expectations, markets generally do well. From this standpoint, we think UK shares look primed to do well whenever Brexit finally does happen. Sentiment toward Brexit—particularly a no-deal Brexit—remains quite dismal. Many expect it to have a deep economic impact. We have observed some pundits citing the UK’s slower gross domestic product (GDP, a government-produced measure of national economic output) growth since the referendum as a preview of worse to come once Brexit happens. There is another Ken Fisher-style tactic we think investors can use to investigate claims like this: Put the data in context. Yes, the average rate of quarterly annualised GDP growth has slowed since the referendum. From Q3 2009 (the first quarter of this economic expansion) through Q2 2016 (the last quarter before the referendum), UK GDP growth averaged 1.99% annualised.[iii] In the 12 quarters since, it has averaged 1.53% annualised.[iv] Yet average GDP growth in Germany and Australia slowed by an even greater magnitude.[v] The UK’s struggles aren’t unique. That so many others seemingly see this differently suggests to us that expectations toward Britain are broadly too low, and the potential for positive surprise is high. We suspect that even if Brexit goes a bit badly at first, that would exceed expectations for total chaos.
Note, it isn’t that Brexit itself is inherently bullish. Rather, because it is so widely feared—and because so many seemingly welcome a delay, as if kicking the can won’t simply extend uncertainty—it creates an opportunity. Whether the UK economy would ultimately be better off in the long run in or out of the EU is a question that will never have a definitive answer. Books will be written, but all will merely guess. For investors, what matters is what is right in front of us. Today, that means Brexit. When it happens, uncertainty should fall fast. Businesses will better understand the rules. Once people get over any immediate emotional shock, they can get on with making everyday decisions. Life will go on, and in our view, markets should move on—potentially buoyed by positive surprise when the worst-case scenario doesn’t happen.
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The preceding is provided for informational purposes only. It is not an advertisement or information about Fisher Asset Management, LLC; Fisher Investments Europe Limited; Fisher Investments Ireland Limited; Fisher Investments Luxembourg, Sàrl; or Fisher Investments Australasia, Pty Ltd (collectively, the “Fisher Group”). It constitutes the general views of the author and should not be regarded as personalised investment advice or tax advice or a reflection of the performance of the Fisher Group or its clients. No assurances are made the author will continue to hold the same views, which may change at any time based on new information, analysis or reconsideration. No assurances are made regarding the accuracy of any forecast given. Not all past forecasts have, nor future forecasts will be, as accurate any contained in the preceding. The portfolios of clients of the Fisher Group may or may not contain any securities mentioned. The statements made in this article as of the date of the publication may no longer be applicable.
[i] Source: Office for National Statistics, as of 9/10/2019. Quarter-on-quarter percentage change in real UK business investment, seasonally adjusted, Q1 2018 – Q2 2019.
[ii] “The Latest on Brexit From the Decision Maker Panel,” Nicholas Bloom, Philip Bunn, Scarlet Chen, Paul Mizen and Pawel Smietanka, VoxEU, 29 September 2019.
[iii] Source: FactSet, as of 9/10/2019. Quarter-on-quarter percentage change in real UK GDP, seasonally adjusted and annualised, Q3 2009 – Q2 2016.
[iv] Source: FactSet, as of 9/10/2019. Quarter-on-quarter percentage change in real UK GDP, seasonally adjusted and annualised, Q3 2016 – Q2 2019.
[v] FactSet, as of 9/10/2019. Quarter-on-quarter percentage change in real German and Australian GDP, seasonally adjusted and annualised, Q3 2009 – Q2 2016 and Q3 2016 – Q2 2019.