The UK is home to “The World’s Most Unpopular Stock Market” according to Bloomberg in December. The Financial Times said that UK stocks suffered from “benign neglect” from international investors. And just about everyone and their mother thought the UK’s FTSE 100 index was “undervalued”. Why? Because of Brexit, of course! It was supposed to lead to complete economic chaos, don’t you remember?
But what if Brexit is actually a good thing? A good thing for the economy, for trade, immigration, jobs, foreign investment, the pound and even the UK stock market?
The FTSE 100 index did hit an all-time high just a few months after the Brexit referendum, after all…
This is not to mention record-breaking foreign direct investment (FDI) and jobs data as Brexit optimism gripped everyone except journalists and economists…
These days, even some Brexit’s doubters are coming around to the same conclusions which made the UK vote for Brexit in the first place. It’s about opportunity and the future, not the EU’s bungling past. And, as the world catches on to this, I expect UK stocks to outperform dramatically.
Getting paid to Brexit
It isn’t capital gains which caught my interest today. You see, undervalued stocks present another opportunity. They create higher dividend yields too. They offer more dividend return per pound invested, thanks to the lower starting price of the stocks.
At a time of ridiculously low interest rates, fears of inflation and the UK’s escape from the regulatory burden of a protectionist bloc, the companies listed on our global stock market offer good dividend returns which should, in some cases, rise with inflation. This is in stark contrast to bonds.
Even the Financial Times is a fan: “comparing the FTSE All-Share’s dividend yield to the income available on benchmark government bonds, the index is near its cheapest levels since the start of World War I, say Citigroup analysts.” In other words, dividends are offering good payout returns relative to their cousins, bonds.
The difference between bond and dividend yields is that dividends can rise, which is crucial if you fear inflation. But that only works in the right stocks. More on them will be written in coming weeks.
I think it’s likely that those investors who are hungry for yield, including the big institutions like insurance companies and pension funds, will have to move out of bonds and into dividend paying stocks in coming years. That means that, perhaps, capital gains are on the menu too…
Suddenly, Brexit is full of opportunities
But why is there the sudden optimism about post-Brexit Britain?
It’s obvious, in hindsight. Fears were always going to fade, over time. And opportunities were always going to emerge, over time. That’s a good combination for stocks.
The recent data we discussed yesterday was so good that even the Remainers at Bloomberg published this headline: “Brexit Chaos Gone, the U.K. Is Too Cheap to Ignore”.
I’m not sure what chaos they’re referring to, but at least we can agree on the latter bit. UK stocks should be on top of your radar. Actually, they should’ve been a few months ago, when Brexit doom and gloom still held sway at the Financial Times and Bloomberg.
Reasonable Remainer John Authers adds that even the pound might be looking good. And the reason why is especially fascinating to me…
More tangibly, the Bank of England announced last week that it was starting to taper the asset purchases begun last year to help the economy through the pandemic. It is doing so ahead of the Federal Reserve, which is still not talking about talking about tapering, and the European Central Bank, whose asset-buying program is currently much more aggressive.
What makes this so interesting is that economic results these days depend as much on government and central bank fiddling as on the economy itself.
For example, an economy which is sclerotic on 0% interest rates is in worse shape than an economy with the same poor growth, but higher interest rates. Central banks and governments have so much influence these days that, when comparing economies, you need to keep the comparative policies in mind too.
If the UK is outperforming, despite less fiscal stimulus and less monetary stimulus than other nations, then it is outperforming by a larger margin than first glances might suggest.
Another argument which Authers makes is, believe it or not, “political stability”. Yes, it only took a few months of Brexit for Remainers to see the UK in that light…
They’re right, of course. Brexit helped the Conservatives to a massively decisive win… once a Brexiteer was finally in charge. This delivered Boris Johnson’s majority.
Opinion columnist Wolfgang Muenchau mentioned both the good economic data and our Brexit inspired future as the reasons for optimism:
What these and other numbers are telling us is that even this bit of the Brexit scare stories will not come true. If you look at the latest IMF data and projections in the graphic above, you don’t find a discernible macroeconomic effect of Brexit in the first ten years after the referendum. UK growth fell by more last year than eurozone growth, but this will be offset by higher growth this year. The future prosperity of the UK will depend to a large extent on the future policies of the UK government – Brexit or no Brexit.
That’s exactly what Nigel Farage and I have been saying for years. Brexit is an opportunity. An opportunity to improve how we are governed. Brexit, in and of itself, decides nothing in how we are governed. Only by whom. I think a UK government is slightly more likely to govern us better than an EU government. But only slightly… hopefully… probably…
Muenchau still thinks our government will muck it up though:
I am not making the argument that Brexit will be an economic success. I don’t think it will. The best economic argument against Brexit is the one that was never made: that a UK government under either Labour or the Conservatives is unlikely to make best out of the opportunities for regulatory divergence.
I think it’s fair enough to doubt the ability of our government to make the most of Brexit. I have my own doubts, solely because government make a mess of everything they try to do. But don’t forget, it’s a comparative race. How would we have fared within the EU, versus outside it. I think, by that measure, Brexit is likely to be a clear winner.
But notice something interesting in Muenchau’s comment. Regulatory divergence from the EU is a good thing, with opportunities…
That’s a new narrative from Brexit critics. I wonder if it was factored into economists’ assumptions when they calculated their projections…
Another twist in the narrative is one which Nigel was confident about when we first met, but I’ve been surprised about his prescience once again. Muenchau argues that history will judge Remainers accurately:
The forecasts of unmitigated gloom, however, have been wrong and deceitful. When economists failed to predict the global financial crisis, they did not so out of malice or political bias. But their Brexit forecasts were not an innocent mistake – nor will they be remembered as such.
How quickly the worm can turn in politics. As soon as Nigel left, his views became perfectly acceptable all round. Next thing, Barnier will be in favour of banning immigration!
Nick Hubble
Editor, Fortune & Freedom
