A sterling future is waiting for us on the other side of Brexit
The public finances are in good shape. Employment is at record levels. The economy is growing at a perfectly reasonable rate, and the country is politically stable, with a moderate centre-right government secure in power and with virtually no threat from populist insurgencies. It sounds like a remarkably attractive safe haven – the perfect place to park some cash in a turbulent world.
Where is it? It is, of course, the UK in five weeks’ time.
For the last two years, sterling has taken a battering and British assets have been shunned by global investors. Our tortured exit from the EU and the political chaos it has unleashed have resulted in international money giving us a wide berth and rightly so. But that is about to change.
Getting out of the EU has been a traumatic process. But once it is done, it is done, and the outlook will suddenly look very different. Compared with other major economies, Britain is going to be in better shape than most – and investors will notice.
There is no question that global investors have wanted nothing to do with the UK ever since the referendum result in 2016. Sterling sank like a stone, and the FTSE took a battering.
A Bank of America Merrill Lynch survey in December found a net 39pc of investors underweight on the UK, the second highest number on record. Most of them would sooner invest in Kazak yak-hide futures than anything with the word British attached to it.
We were splitting away from our major trade partner, and the Government was so chaotic that even describing it as a banana republic seemed slightly insulting to the curved, yellow fruit. Even worse was the threat of a far-left Jeremy Corbyn-led government raising taxes to punitive levels and nationalising anything that moved. It was a mess and understandably few people wanted to back it. It remains to be seen what happens in March, of course. Parliament may agree to Theresa May’s deal. The EU might compromise on the backstop. We might crash out and fall back on WTO rules. We might have some modest delay to Article 50. No one quite knows yet. And yet, the most likely outcome is that on March 30 we will be out of the EU, either with or without a deal, and almost certainly won’t be going back in anytime soon.
The economy may well wobble, especially if there is no deal. But plans have been prepared and contingencies mapped out and, while there may be some disruption, once we are through that the outlook will start to look very different. As a former member of the EU that has regained some measure of sovereignty, the UK will quickly start to look very attractive.
Just take a look at some of the numbers. The public finances are in decent shape, with a record surplus in January on booming tax receipts. Debt isn’t really a problem and the Treasury has plenty of scope to stimulate the economy if there is a downturn.
Employment is hitting fresh highs and wage growth is starting to accelerate, which is going to help demand keep on growing, and that is likely to continue if immigration keeps on coming down with an end to freedom of movement. Investment continues to pour into the country, especially in the fast-growing technology sector. Sure, there are plenty of problems. The trade deficit is terrible and leaving the EU will probably make it worse in the short-term at least, and productivity remains as dismal as ever. But every
‘Compared with other nations, Britain is going to be in better shape than most – and investors will notice’
major economy has challenges. Ours are no worse than most.
More importantly, the political risk will evaporate. The UK will have a moderate centre-right government, ahead in most polls, and with no need for an election for another three years. The opposition has split, and may well see further defections, and as it does so the threat of a hard-left Corbyn administration will recede. Compare that with some of our rivals. The US has a chaotic administration, with a president under threat of impeachment and the Democrats swinging sharply Left, campaigning for wealth taxes and a 70pc top rate. Italy is run by a populist coalition openly toying with leaving the euro. France is beset by riots, and led by an unpopular president who has abandoned reform. Germany is sliding into recession with a weak coalition run by a chancellor who has already announced her retirement, while Japan seems about to enter its fourth decade of stagnation.
Against that, the UK’S mix of political and financial stability, coupled with respectable growth, doesn’t look too bad. With sterling and British equities relatively cheap, investors are suddenly going to get interested again.
The markets are, by their very nature, forward looking, and the UK’S future looks OK. As global investors start to see sterling as an attractive safe haven, it will start to appreciate and potentially dramatically so. The pound at $1.50 by the end of the summer and €1.25? Don’t rule it out. It could happen faster than anyone expects.