Why Britain Could Be Facing Recession

Investec's Simon Brazier says investors should be wary - Brexit brings a real risk of recession. But luckily many UK stocks are not sensitive to domestic growth

Emma Wall 22 February, 2019 | 7:22AM
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Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Simon Brazier, Manager of the Investec UK Alpha fund.

Hi, Simon.

Simon Brazier: Good morning Emma.

Wall: So we had a bit of pullback in Q4 last year. Markets have come up slightly since then but are things looking attractively valued, did that give us opportunities or do you think actually there is more to come.

Brazier: I think it gave us some opportunities, but the reality is we're 9, 10 years into a bull market and valuations across the pace is still relatively full. So, and I do think there is more risk to come. So the worry for me is that we definitely haven’t seen the lows in markets. Because if there was more concerns around some of maybe the macro risks, you could see valuations coming down due to uncertainty.

Wall: While we are talking before the camera started rolling about what some of those risks were and you said that it would be foolish not to flag there is some risk it could be a recession in the UK. How big a risk is that and should investor be concerned?

Brazier: I think investors should be concerned. I do worry about the UK economy. There is only four components to GDP. What the consumer spends, what businesses spend, what governments spend and our net trade position. Net trade doesn’t make a big impact.

The Government has said that they are going to increase government investment spending I think with one eye to where the economy could be, but also post Brexit they want to make sure there is some stability in economy from their point of view. But they can't do all the heavy lifting and that’s the point, two-thirds of UK

GDP is the consumer and about 20% is business investment, and business investment growth has just seen basically a year of negative growth. And that’s no surprise to me reality is longer term the UK has to fund itself we have a big – we have the largest current account deficit in the G7. You have to fund that. And the reality is, that was done previously via business investment and foreign direct investment and Brexit has put the uncertainty in place.

And so, that's why you've seen weaker currency to try and attract flows elsewhere and I don't see business investment increasing anytime soon. Even if we had a wonderful Brexit, you still haven't got a free trade agreement in place. So, I still think there's uncertainty.

But the biggest issue is the consumer. And the consumer has been relatively well-behaved. I mean, there's only two ways you can grow consumption in the UK One is growing real wages and one is increasing spending and reducing your saving. The Office for Budget Responsibility is telling us that the savings ratio is basically zero right now.

So, people are saving none of their disposable income if you don't include pension saving. Therefore, they have got the consumer – the only other place to go is to grow through real wage growth. And I don't believe that many of us are going to be demanding above inflation real wage increases the next few years. And if we saw any hit to the economy and people started to save more, that just reduces GDP.

So, I worry that the consumer and the economy to a degree is slightly on the edge. And when you've got GDP numbers at the moment of around 1% falling below zero is quite possible with those sorts of dynamics I'm talking about. So, there is a risk there.

Wall: Before people get too depressed, we should maybe caveat with the fact that the economy is not necessarily the stock market, is it? Because low currency has actually been really good thing for the FTSE 100.

Brazier: And luckily, for us, is that we have the safety valve of the currency. I mean, there are longer-term implications about that. But the reality is, is if you see more stress around Brexit, or even more stress in the economy, sterling will weaken. Less than the third of UK revenue for companies comes from the UK and it provides a big fillip to the stocks markets and is that safety valve.

So, you know, definitely, as I say to people, don't underestimate the UK stock market. We are the third largest equity market in the world. We have wonderful corporate governance and great global businesses. And for me, there's a lot of opportunities, very liquid and we have some many, both large and mid-cap stocks that longer-term look quite attractive.

But just be aware, I think, that there's been a lot of people saying, you know what, the UK consumer, domestics are oversold, this is the biggest opportunity I've seen. I'm being a little bit more patient.

Wall: Simon, thank you very much.

Brazier: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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