Headlines:
Comment:
Democracy has once again delivered a shock to the political system! Certainly aided by the employment of social media and those who use it (i.e. principally the younger voters) alongside one very effective and one shockingly ineffective campaign strategy. But what were the public voting on – not so much about Brexit I suggest (although a softer Brexit would appear preferred by the majority) but more about austerity and spending on public services and especially from the 18 -25 year olds. Had it been principally about Brexit, the Liberal Democrats (who were strongly opposed to Brexit) would have picked up many more votes, but instead the Country focused on only the two main parties, at least outside of Scotland. In Scotland, SNP were given a sharp reminder that their seemingly singular focus on independence and a second referendum was not being well received and this is going to cause a great deal of confusion for them as they have little else to differentiate their platform.
I am going to work on the basis that our observations on the outcome of the General Election will need to come in at least two parts: (i) our initial reaction (below) and then, (ii) a more informed commentary as the dust settles and the ‘experts’ forensically analyse the result and its likely impact.
So back to basics and what we have learned from the General Election results so far, other than the Conservatives had a disastrous campaign and Labour, in opposition and without expecting victory, could promise the world through throwing money at every perceived problem without justifying properly where it was coming from. As I say above, it would appear that the principal differentiator between the Parties was about matters that are not directly Brexit related, although it is hard to completely ignore the tide of opinion over the hard and soft options. Both the Conservatives and Labour agree that the British public want to exit the EU and so this is what must be achieved with as little damage as possible. There is an argument that says a deal with the EU is more rather than less likely now as the weaker position of the Conservatives will mean a softer approach to the EU, but contrary to this is the argument that the UK are now in a weakened position.
Certainly, if the Conservatives have any sense at all, their response to the Election result will be to go back to the drawing board and amend their policies on austerity and public spending as well as seeking cross-party support for Brexit related matters. They should also address the demographics and realise the young seem not to like the Conservative approach to life generally.
Our Brexit related views:
Over the past few months, we have described what we believe to be the short, medium and long term perspective of Brexit. What is it that we have been saying and then how have our views changed as a result of the Election outcome? I set this out below:
Let’s start with the medium term: it is our opinion that the UK will remain a safe haven for international investment capital for all the reasons we are familiar with. We also believe that the UK and the EU will need to reach an appropriate compromise on their relationship going forward, because we believe they effectively have to at some point – for the economic and social health of all involved (and many that are not yet) and a softer rather than harder exit now appears more likely! Negotiations will take time, may well include transitional agreements and time extensions and will, no doubt, involve plenty of intermediate venom and vitriol magnified by the salivating media. However, the end result will likely be pros and cons for both sides of the divide but, we suspect, not materially worse going forward than at present once the dust has settled. Wilful blindness on our part?……Perhaps, but hindsight will have to be our judge on this.
We also believe that a UK unfettered by the ‘unelected eurocrats’ and free from imposed EU restrictions will be able to negotiate trade deals with economies that are faster growing than the EU – such as China, India, Canada, the US and more. The Election result has not materially changed our opinion on this medium term outlook beyond what I have said above, other than an expenditure policy versus the current austerity measures might see GDP growth benefit (at the cost of increased tax and debt).
In the short term: it is our opinion that the UK negotiations with the EU and the reporting on it will cause concern, confusion and disruption. Not a comfortable environment for anyone, but one in which opportunity lies for investment funds such as ours that like short term weakness as long as it translates into a means to create medium (and longer) term value. The Election result has magnified this perspective and does not take away from the investment themes we are currently pursuing.
In the longer term: it is our opinion that the UK may be better off out of the EU (and the Executive Committee of Moorfield all originally voted to remain!) for reasons that are much more about the EU and the Eurozone than they are about the UK or its reliance or role in the EU. We have no crystal ball of course and we are talking about the unpredictable world of politics rather than the world we more readily understand of business, real estate and finance – however, we can’t immediately see how the mechanics of the EU and eurozone can continue without some major changes.
We are told by the politicians that the answer to the broken experiment that is the eurozone lies in federalisation (i.e. greater monetary and fiscal union). But the voting public across the EU would appear to be pushing hard for greater nation-state independence. So how does that work? Have I not just described opposing forces? We think that the bullet of a Le Pen victory has been dodged for the EU project but it’s a story far from over. Le Pen victory would have likely resulted in a disastrous event for the EU as an ‘in-out’ referendum similar to the one in the UK would have been called for (as it would have been if Wilders had triumphed in the Netherlands – and perhaps still will be if Grillo succeeds in Italy in September) and the result of the referendum(s) would be by no means predictable. President Macron and others seem to have recognised the need for change in the EU structure – but what change, what resultant impact and at what cost….short, medium and long term. The UK Election result does not change our opinion.
Am I being too pessimistic about the EU and the Eurozone? Well, it is worth remembering that Europe, despite some recent GDP growth, has clearly not yet properly recovered from the effects from the GFC. Low growth, high unemployment and unrecognised losses are still present across the continent. This week’s rescue of Banco Popular by Santander (bought for 1 euro and requiring 7 billion euros of fresh investment) and the re-emergence of debt issues in Greece (where the IMF and Germany are again in disagreement about the right way forward) are a helpful reminder of the risks in continental Europe and the issues facing the eurozone.
The Brits may be relentlessly snatching defeat from the jaws of victory on a number of political fronts but it could still prove to be the case that we have escaped the EU just in time!
Finally on UK real estate investment, post the Election, we will hold the line on the view that Brexit related disruption and caution in the short term will see many investors nervous of the UK. However, this is an opportunity as long as you believe the medium term is a more settled environment. We also continue to believe that investing in discounted assets with short term income will enable value-add returns to be achieved if those investments can be actively managed into assets with longer term stabilised income, which is also true of select development projects that show the same stabilised income characteristics.
More soon……