UK General Election – 12th December
Boris Johnson’s failure to deliver and secure a deal with the European Union is due to a lack of confidence within Parliament. Subsequently, December 12th is the date that has been marked for a general election, with the Prime Minister’s intentions to secure a working majority which will hopefully result in the passing of the final Brexit deal. The Conservative’s biggest threat is Labour’s slow incremental increase in the overall share of the vote. The most recent results show that Labour have seen an increase of 7%, from 22% to 29% on the opinion polls. The Conservatives have seen a 5% increase, from 34% to 39%. If this current rate continues all the way up to December 12th, the final polls between the two constituents will be a much finer margin.
In financial terms, the main concerns vary dramatically depending on which constituent arrives on top, come the December 12th. Labour’s strategic focus has recently been aimed towards the lack of care the current Government has made to tackle the recent flooding, alongside plans to increase the NHS budget; as there have been many talks of negotiations for a trade deal between Mr. Johnson and Mr. Trump over additional contracts which will look to privatise the NHS further.
However, a Labour government, post-Brexit, would be considered unfavourable for the UK market. UK equity and the currency would most likely take a hit due to the immediate 10% redistribution of company shares to workers and the nationalisation of electricity, rail and water companies. Already, the UK has seen both SSC and the National Grid move their headquarters offshore amidst fears of a Labour government.
Towards the end of October, the Queen made her speech to the public, in which the Labour party were quick to point out that there were no efforts to pledge protection on NHS privatisation. Over the past ten years, the number of private contracts being offered has increased year on year. As it now stands, 18% of NHS funding now goes to private companies such as Richard Branson’s Virgin Care and the US based Priory Group. Speculation over this matter focuses concerns around the time of the assumed Brexit decision, which will act as the catalyst for the potential direction of the NHS’s future. The US medical industry are on standby, waiting to be given the opportunity for further contracts to be issued under the prediction that, if Boris Johnson wins the general election, there will be further talks of a Johnson-Trump trade deal and the NHS will continue down the road of further privatisation.
Fears over the implications that follow are that privatisation becomes harder and harder to reverse. The stronger the bond becomes between US medical companies and the reliance the NHS has on them, the NHS could face serious legal challenges in situations where they would wish to reduce or remove the level of privatisation. Initially, pharmaceutical companies receive the initial deal to provide the NHS with drugs contracts, which will then be extended to many other areas of investment.
From a public perspective, the main impact of this situation is the price of pharmaceuticals. With contracts being handed to companies, the price members of the UK would pay for pharmaceuticals would rise significantly, not to mention the cost of the outcome – the beginning of full private health care. Conversely, from an investment perspective, this turn of events increases trade post-Brexit. Additionally, the UK will look to bolster old trade deals, whilst creating agreements in order to secure the future of what will be a temporarily delicate economy.
US / China Trade War
The origin of the current US/China trade war arises from President Trump’s concerns over the US’ increasing deficit. Coming up to the President’s year for re-election, it is absolutely in Trump’s interests to bring the US deficit down in order to advertise the state of the US economy to a population who will then be willing to give the current president another term in office. Subsequently, China have received the brunt of the tariffs, which have been imposed on hundreds of products which are exported to the US daily. The total value of goods sanctioned approximates $250bn. The issue then became ‘tit-for-tat’, as China retaliated with similar tariffs on US goods.
Unfortunately, the implications echo on a global scale, causing global trade to contract. Primarily, both China and the US are suffering now. US exports to China have declined by 19.1% in the month of October, and China’s computer and office machinery exports has declined by $15bn. The global shift has re-allocated the distribution of global growth and exports for the past month, as companies domiciled in affected countries have suffered greatly. Interest has picked up in neighbouring countries such as Taiwan, Vietnam and Mexico, where a total of $10.3bn export revenue has been captured by these changes.
Negotiations between the US and China has progressed to the point where the two economic superpowers are looking closer to withdrawing the tariffs in phases if a broader deal can be struck between the two sides. Analysts, however, believe that Trump’s strategy may be to bring the tariffs down for the Christmas period to avoid deterring the US consumer from spending during the festive season. If this is the case, the new year may be a new start in the wrong direction.
US Federal Reserve Cut Interest Rates
Amid continued concerns about global trade tensions and slowing economic growth, the US Federal Reserve cut interest rates by 0.25% for the third time this year at the end of October. The first interest rate cut since the Global Financial Crisis was implemented in July of this year.
This decision also came about as it was revealed that the US economy has slowed to an annual rate of 1.9% in the final quarter of 2019, the slowest rate of expansion in 2019.
The US Federal Reserve can raise interest rates in order to control an overstimulated economy. In reverse circumstances, they cut interest rates to stimulate economic growth.
The Fed wish to maintain this period of growth as it is the longest in US history and they are moving into a critical election year. This is of significant importance globally as ‘Where the Fed leads, the rest are forced to follow’.
The Fed has considerable influence over world markets, as it is the central bank for the world’s largest economy. Currency exchange rates, the cost of borrowing globally and the prices of goods and services are ultimately decided by the interest rates set in the US.
In particular, bonds will offer more protection when interest rates are cut as income has been decided before the cuts. There is also an inverse relationship between bond prices and interest rates, so as interest rates fall, bond prices will rise. Conversely, banks, mortgage companies and insurance companies' earnings often decrease as interest rates are cut as they must charge less for lending.
Since the cut, Federal Reserve Chairman Jerome Powell has stated that further cuts are unlikely in the coming months unless a further slowing in the economy calls for a ‘material reassessment’.
UK Growth Slowest In a Decade
Official figures released this quarter have revealed that Britain’s economy has grown at the slowest annual rate in almost a decade.
In good news, formal statistics revealed how the UK avoided recession with a GDP of 0.3% in the third quarter, this follows second quarter’s GDP contraction of 0.2%. Technically, two successive quarters of negative growth indicates recession. This is often associated with falling incomes, lower consumption and job cuts.
However, if you were to take the two quarters together, you get the impression of a flat economy. The Office for National Statistics have said that year-on-year growth in Quarter 3 of 2019 has slowed from 1.3% to 1% and the November Monetary Policy report from the Bank of England blamed this volatile growth in the UK in part on Brexit preparations.
Boris Johnson's Brexit deal has caused the Bank of England to downgrade its forecast for UK growth in 2020. The ongoing Brexit-related uncertainty and market volatility through out the UK, business investment has been on a declining trend and is on course for the most extensive slump in business investment in 17 years. The British Chamber of Commerce have made comment on how this period of downturn this is expected to continue until Brexit is resolved.
Chinese GDP Slowest in 30 Years
China has felt the impact of the ongoing trade war with the US, GDP rose 6% in the July-September period from a year ago, the slowest pace since the early 1990s.
For the rest of the year and going into 2020, China’s growth prospects are expected to weaken further as drag of the trade war continues to be a burden on the Chinese economy.
Historically, in times of slowing growth, the Chinese government have instigated lending programmes with the aims of encouraging construction in order to boost domestic consumption. However, the current government have done very little in comparison, with action such as some tax reform and cuts to bank reserve requirements.
Louis Kuijs, Oxford Economics said ‘’The Government’s tolerance for slower growth has risen. Thus, we expect it to remain relatively restrained in terms of applying policy stimulus.’’ China’s imports and exports continued to contract in October, as the trade war continues to take its toll on both countries.
There is however some scope for optimism in the ever-changing back and forth between the US and China, as Trump has stated that: “We’re close - a significant phase one deal could happen, and it could happen soon.” This would include the US agreeing to get rid of billions of dollars’ worth of tariffs on Chinese goods.
However, there is likely to a large lag time on this benefiting China’s GDP growth. China will likely look to improve its domestic consumption, which has become a major driver in Chinese economic growth. Retail sales and industrial output held up, but reduced exports from China will have a negative effect on both China’s economy as well as the world economy, and domestic consumption alone is unlikely to stimulate China’s economy enough to offset the falling growth.
Sources: Information is included in this article has been obtained from a range of sources including seminars, webinars, industry publications and general media comments. This information was sourced from November 2019.
Disclaimer: This document represents the opinion of Reeves Independent only and is not intended as advice and no investment decisions should be made solely on the back of this email. Always seek independent financial advice before taking any action. Past performance is not a guide to future performance. All investments carry the risk that you will get back less than you put in.