‘In investing, what is comfortable is rarely profitable’ – Robert Arnott
A regular survey of the views of global investors managing collectively many hundreds of billions of Pound’s worth of assets has regularly shown over recent months that the most disliked major stock market of the world is…the UK. And with the stock market famously being described as a ‘voting machine’ in the shorter-term this has helped contribute to the UK market’s decidedly lacklustre performance so far in 2018.
Fears unquestionably centre on Brexit and the potential for a change of government – and with it the scope for a different business environment. On both matters I believe concerns are over-stated and note that another indicator of prevailing sentiment – the British Pound – continues its recovery against the US dollar and has been little changed in recent months against the resurgent euro. My own view is that Brexit will be softer and with a longer transition period than consensus may anticipate and that the chances of the present government seeing out their full term rises with every passing week.
The issue may be simply that other countries have got stronger and that the significant flows into the UK in the years – after the global financial crisis as the Eurozone lurched from one economic/political disappointment to another and the stronger dollar crimped the emerging markets – have started to simply fade away. A new US President, a weaker dollar helping out the emerging markets and the Eurozone coming off the lows have helped create a different backdrop. Additionally fears about global trade volumes and flows have risen materially in recent weeks and this is never good for an open economy like the UK.
‘Open economy’ is an interesting phrase and it was referred to again last week with the news that Unilever would be simplifying their corporate structure and having their primary domicile in the Netherlands rather than maintaining the current complex Anglo-Dutch set-up. This appears to be a slap in the face towards the UK but look more closely and the story that broke last year of the interest by the Kraft Heinz consumer staples behemoth in buying Unilever may be influential. Unilever fought off that bid by unveiling some corporate efficiency and structure changes of their own but it was also noted that under Dutch corporate law the company had more protection against hostile bids compared to the more open UK system. I wonder how influential this could have been in the decision to favour a primary domicile only in the Netherlands?
Barriers to takeovers – or trade – are typically not optimal over any reasonable time period because they tend to stifle productivity, dynamism and competitiveness. And let’s face it: countries like the UK and the Netherlands have got rich via global commerce. One reason to like the UK market is its open status because if UK shares remain out of favour for too long then more news like the ongoing competitive bid for the UK’s largest pay TV company Sky or the more recently turned down bid by large property company Hammerson will become more commonplace. As the quote at the top of this article notes, a currently uncomfortable and underperforming market may be among the most prospectively interesting.