2016 was a challenging year for investors throughout the world. Not only were there the usual economic, political and social/demographic obstacles to navigate, but additionally there were the seismic shocks of the mid-year UK Brexit vote followed by the year-end US election of Donald Trump. Of course, many other events of significance occurred around the world over this period, but from a macro-perspective not many of them would currently be classified as potential changers of the ‘world order’. This does not mean I am overlooking the significance of events in the Far-East, South America or the huge threat posed by Islamic State extremists and the rise of the far-right (populist-right) in Europe but, without the benefit of hindsight as yet, Brexit and Trump would seem to be the stand-out 2016 events to beat!
Taking those two premier events in chronological order, and without feeling the need to set out the details (considering the extent of coverage already given to this), I thought I would express my perspective following on from the conversations I have had around the world with business people, economists, politicians and commentators. There is no intention to be politically biased in my comments but simply to share my interpretation and set out how this may impact on our investment strategy.
Brexit
I think it would be fair to say that prior to the ‘In/Out’ EU referendum outcome, many in the business community (and especially those in and around London) would have said that their heads and hearts were in two different places. Head says ‘In’ because who wants the disruption and resultant volatility of stepping into the unknown – we all had a taste of that in the global financial crisis. But heart says ‘Out’ because although we believe we understand the benefits of being part of the EU, it is not a good experience to be dictated to by unelected ‘eurocrats’ who seemingly waste vast sums of capital whilst flexing their undemocratic muscles at inappropriate times. In addition to this, many people in the UK and increasing numbers in the EU see the Eurozone as a failed experiment and the EU as now potentially broken in its current form, so why be part of it? Admittedly, if change is to take place then better to be sat at the negotiating table than peering in through the window, but at what cost?
Post the Brexit vote I was surprised by how relaxed many ‘In’ voters were at the ‘Out’ outcome. The familiar heads and hearts conversation often arose and so the actual disappointment was often understandably muted. Economic and political confusion was overruled by the positive attitude of making the most of the situation whatever was coming down the road, accepting that some changes would be for the better and some would likely be for the worse. Volatility and disruption led to opportunity if a positive stance was taken. Many business leaders were still the same as those in place at the time of the global financial crisis and had learnt to crisis manage whilst recognising opportunity through adversity.
I doubt there is anyone who could honestly say that they had predicted the positive (even bullish) market conditions that have been experienced since the Brexit vote. Perhaps this is the lack of clarity as to what an EU exit actually means for the UK or perhaps it is because of the belief that the UK will be better off as independent, especially considering the EU and Eurozone issues that must be faced in the near and longer term. Or, maybe it is because many believe that there is not much that will change in the UK/EU relationship once all the political posturing is over. Whatever the reason, very little changed in market momentum post June, other than a brief stall, and it can’t simply be put down to the immediate actions taken by the Bank of England, a collapse in sterling and a ‘stiff upper lip’! We should remember that there is also a natural economic cycle taking place alongside all these political events with a momentum of its own, even if it is accelerated or delayed by extraordinary events. As we all know, there are many component parts to an economic cycle, for example; inflation, interest rates, employment growth, consumer expenditure, house prices, business and government investment, oil price and more…. and even without the impact of our sentiment over Brexit (or Trump) all of these components come together in the ordinary course to create the cycle – and let’s not forget that none of us know as yet what the QE programme will eventually result in!
Despite the prolonged debate, that is still far from over, it is currently hard for anyone to see a way through to the other side of Brexit, as the fight over what would be considered a ‘hard’ or ‘soft’ version continues and this gives rise to whether the mandate given to the Government by the result of the referendum was ‘exit at any cost’. The current expectation is more weighted towards an extension of time being agreed for the Brexit timetable and a harder version (if that is appropriate terminology), however, this is ultimately a huge negotiation taking place and obviously no one will show their true colours for some while to come.
President Trump
Well that’s a sub-heading I never thought I would type in the real world! Having said that, after the Brexit vote outcome we began to believe it was actually a possibility and whilst on a visit to the US (pre-election) we warned to expect the unexpected after our own UK experience and the rise of the populist movements elsewhere in the world. And so it came to pass. But once again the markets shrugged this off and in fact found the pro-business, pro-growth, anti-regulation Mr/President Trump a rather appealing prospect (at least to date) despite his colourful rhetoric. It’s not my job here to comment more widely on the US economy or political machinations other than to say that an economically strong US and one prepared to be a close ally of the UK is a very good thing for the UK in many respects, especially economically and in the upcoming confrontation with EU-27. The outspoken US President may well say what others silently believe – that the UK is probably better off out than in and actually the EU/Eurozone has many problems ahead that it will need to tackle efficiently and effectively in order to survive in its current form.
Brexit, President Trump, EU/Eurozone – UK real estate strategy
So what has changed as a result of Brexit, President Trump or a rising tide of concern over the EU/Eurozone once again? I think the answer is ‘it’s the economy stupid’. What we are trying to do is look through the politics and media spin to the economics underneath. Yes, the two are intrinsically linked, but let’s not get caught up in the noise and fake news coming from campaigners and journalists. Instead, let’s consider the impact that each of the economic factors that we are predicting actually has on the real estate cycle. It seems to me that, despite Brexit related acceleration in some areas and delays in others, the economy continues moving forward with most, if not all, the pros and cons that it would otherwise have had. We watch and predict; GDP growth for general economic health and sentiment, inflation to judge likely interest rate movements – and this sits together with employment and wage growth (and house prices) to judge consumers’ confidence and likely expenditure. We also watch business, government and foreign direct investment to gauge confidence and commitment to our economy – and additionally to educate ourselves as to likely areas for value enhancing impact. In other words, other than some yield weakness in short term income (reflecting increased concerns over occupier demand), not a lot has changed in our outlook for UK real estate since the start of 2016, although we are further into the cycle which therefore requires greater caution in the form of risk assessment. I still firmly believe there are investment opportunities that will meet our investment return thresholds despite our greater caution.