UK Economy Will Rebound Post Brexit says Buxton

UK consumer confidence will pick up post Brexit says Merian's Richard Buxton - and coupled with wage growth and the end to austerity we could see an uptick in the economy

Emma Wall 21 February, 2019 | 12:26PM
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Emma Wall: Hello, and welcome to Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Richard Buxton, Manager of the Merian UK Alpha Fund.

Hi, Richard.

Richard Buxton: Good morning.

Wall: So, we can't talk U.K. without talking Brexit, unfortunately. I suppose the big question is how concerned are you about Brexit?

Buxton: Well I am taking my cue from the currency market, because sterling is judge and jury on this, and to my amazement sterling remains remarkably sanguine. It's quite well bid. So, the markets are telling us don’t worry, we're not going to have any sort of horrible new deal exit. And similarly, sterling related U.K. domestic shares have actually been rallying.

So, I think we just got to work on that basis. I still think there is a risk that at some point the market slight panics. It's clearly going to go to the wire, but what I think is clear now is that it is beginning to have a real economic impact. We have been growing very nicely at kind of 0.5%, 0.6% a quarter and that’s now down to kind of 0.2%, 0.3% and business investment, business confidence, consumer confidence its all beginning to have an impact.

So, I think this as bit of handbrake on the economy that the moment we can release the handbrake then actually I think we will surprise positively in terms of growth through backend of this year into 2020. And which is why I am pretty upbeat about the U.K. stocks. We're on 13 times this year's earnings which is pretty much in line or below our long run averages.

International investors have kind of abandoned U.K. So, I think if we can release the handbrake than actually the U.K. will positively surprise. We still got a very, very vibrant labor market. We've got huge entrepreneurial dynamic in the U.K., lots of net new business formation. But we just need to get the B word done and dusted.

Wall: If its not Brexit then that is clouding your horizon is there anything else that you think that U.K. investors should be concerned about? Or is it indeed the relatively positive picture as you seem to be painting.

Buxton: I think for the U.K. we're not in a bad place. Clearly globally things are slowing. Things look really very, very sluggish in Europe and I don’t know quite what the European Central Bank does for an encore. Because they haven’t even raised interest rates yet, and they kind of need more stimulus and help. I think the U.S. obviously the jury is out, but I suspect that it's kind of soft landing, last year was an extreme sort sugar rush because of the tax cuts.

But I don’t think it's in eminent recession. Again, the bond market everyone's obsessively watching the yield curve, the difference between long and short rates and as that has narrowed it's traditionally a harbinger of recession. I don’t think that that'll be the case. So, I think that the U.S. would just be returning to kind of trend growth.

So, they are the kind of big macro pictures to look at, but as I say the U.K., I think, is slightly different because of Brexit and I think as I say if we can get through this then actually there'll be kind of sigh of relief even consumer confidence I think will pick up because people are kind of fed up with talking about this, including me.

We just kind of look forward to getting beyond that. Now, the bears would argue that well we're just swapping one form of uncertainty for another because we'll then have two years of these transitional arrangements and having to negotiate what our true trading position is. I suspect that that’s not going to impact activity and behaviour.

I think people will just go, well, at least we've made some progress. We've got a deal of some sort and actually say the return to the fundamentals of the strength of the labour market, wage growth, we've got 3% private sector wage growth.

The government has signalled end to austerities. So, I suspect that over the next year or two. You may actually see some public sector wage growth. So, I think yes, we'll actually surprise on the upside.

Wall: Richard, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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