A Riddle, Wrapped in a Mystery, Inside an Enigma

J-Curve … Dickens … Brexit … this unholy trio crept into my consciousness as I listened to the ever-insightful Neil Parker, RBS’s FX Market Strategist.

Let me explain:

J-Curve: a graphic (economic) depiction of a country’s trade balance, highlighting the fact that things will get worse, before they get better – think about the recent gloomy consensus prediction (from 20 firms of agents and property fund managers), for London office performance and their more optimistic forecast for 2021

Dickens: a ’mash-up’ of that classic opening sentence from ‘A Tale of Two Cities’

Brexit: Neil was unusually upbeat about our post-Brexit future despite

  • The Office for Budget Responsibility’s depressing recent ‘correction’ of its forecast for UK productivity – downwards
  • Brexit negotiations appearing to hit a series of buffers – with less than 500 official days left
  • Sustained distractions for a Government struggling to govern – from Boris’s red lines on Brussels regulations and sleazegate claiming the political lives of two Cabinet members, to Michael Gove undermining the Chancellor with his own Budget (allegedly) and the PM’s recent attempts to appease all sides in her party with the proposal to enshrine the exit date in law
  • Trump’s classic soundbite about a trade deal with the US (‘Britain will not be at the back of the queue’) evaporating like the morning mist given his ‘America First’ doctrine – think Bombardier.

So why the optimism?

Neil’s upbeat message was, take the long-term view. Think beyond Europe, the USA, the Autumn Budget and March 2019.

He believes that UK productivity can be improved by greater and faster adoption of innovation and technology. In response (or so it seems), the Government’s new white paper on a national Industrial Strategy outlines long term plans for sectors such as life science, construction, AI and automotive.

Beyond our shore, emerging markets and developing countries account for over 50% of the world’s GDP – perhaps our global trading potential is therefore much greater than we previously thought.

Looking enviously at Euroland, I was relieved to hear that UK growth may have troughed and Euro growth may have plateaued – now that the European Central Bank has started to stop “…throwing a wall of money at the problem”.

Another reason to be cheerful … the rise of the super authorities (think Merseyside and Manchester) at the expense of London is great news for the nation as it is a catalyst for infrastructure investment, making the regions more attractive to investors, the labour market and companies seeking partnerships with high value sectors – such as life sciences, technology, media, etc.

UK factory output rose for the fifth consecutive month – thanks to a weak sterling.

It’s all a question of perspective: think only about Q4/2017 and you will probably reach for the revolver. Think five years and beyond, or even the second quarter of this century and the frown will turn upside down.

I mentioned this to a Fund Manager friend and he gave me a wry smile, raised his eyebrows and pointed out (with a metaphoric shake of his head) that he and his fellow investment strategists thought in terms of three-to-five years, not 25.

So, who is right: optimistic Neil or pessimistic City Boy?


James Routledge
James Routledge 06 December 2017

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