Government Must Start Talking Up the UK Economy
Date
7/10/2016 9:19:43 AM
(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money, Thu
Government Must Start Talking Up the UK Economy
Here is the opening of this sensible column by Allister Heath for The Telegraph:
What is wrong with the government? The fact that it has been destroyed by the referendum doesn''t mean that it should no longer govern. It has a duty to keep the show on the road, and that includes demonstrating that Britain remains open for business. It needs to reassure, not simply shrug.
The campaign is over. The government may not like the way the vote went, but its duty is to urgently reprogramme itself and to make the most of the situation. Project Fear should not turn into a self-fulfilling Project I told You So. Sadly, it has, at times, felt as if the Prime Minister no longer really cares, and is refusing to take simple steps to stabilise the situation. All political careers end in failure, but sulking is never right.
The Chancellor has been little better, but at least he has unveiled a proposal to slash corporation tax to 15pc, a move which may well be enough to (for profitable firms) cancel out any freshly-imposed tariffs, were we ever to get to that. We need far more of this kind of thinking to cancel out the broken animal spirits in the City, and to paint a picture of a pro-growth economy.
The most outrageous, unacceptable and economically damaging failure of the past 12 days is the way EU residents who reside and work in Britain have been left in the lurch. The Leave campaign explicitly stated that all such people would be allowed to live here when we leave the EU; the only people making an issue and claiming that this wouldn''t be true were certain elements of the Remain side. The issue was put to rest when Leave firmly pointed out that this wasn''t its policy, and it cited - convincingly, in my view, the fact that international agreements such as the Vienna Convention on the Law of Treaties mean that acquired rights (to reside, in this case) don''t suddenly vanish if the underlying treaty is repealed. Under the Charter of Fundamental Rights, which would still bind the rest of the EU post-Brexit, ''collective expulsions are prohibited''.
David Fuller''s view
A degree of confusion and paralysis among failed politicians following a momentous and at the last minute, unexpected result such as the vote in favour of Brexit is a concern. It certainly adds to uncertainty at a time when people are looking for leadership, and this has a negative economic impact over the medium term.
Politicians expecting or hoping to be part of the next government may feel inhibited before actually taking on the power of office. Fortunately, Governor of the BoE Mark Carney and Chancellor of the Exchequer George Osborne have been sensible since the referendum outcome.
Theresa May remains the clear favourite to be UK Prime Minister following a strong first round performance. Moreover, the two lagging candidates dropped out and pledged their support to Mrs May. Two other candidates remain but only Andrea Leadsom has a slim chance of overhauling May in Thursday''s second round election. Michael Gove will be out of the running following that vote and most likely throw his support to Andrea Leadsom. The two candidate race will be opened to paid-up members of the Conservative Party who will elect the first woman Prime Minister since Margaret Thatcher. I wish that vote could take place before September but at least the candidates will be free to focus on the UK''s exciting medium to longer term potential.
A PDF of Allister Heath''s article is posted in the Subscriber''s Area.
The Weekly View: Tactically Cautious
My thanks to Rod Smyth and Kevin Nicholson for this excellent service published by RiverFront Investment Group. Here is a brief sample from the opening:
At RiverFront, we look at market opportunities both strategically and tactically. Communicating our views is easiest when both are aligned and most challenging when they are at odds, as is currently the case. Last week, we implemented a second round of risk reduction trades in our portfolios. This trade involved selling international stocks and buying long-maturity Treasury bonds. Our Price Matters discipline continues to highlight the long-term value offered by international stocks and the low long-term yields offered by bonds. Despite this, we believe there is sufficient risk in stocks and adequate opportunity in Treasury bonds in the coming months to move temporarily away from our strategic stance, so these trades were based on our tactical view.
David Fuller''s view
OK, fair enough and RiverFront has been very successful for many years. I assume that they will eventually move out of Treasuries and back into equities, taking advantage of lower prices and higher yields. Far be it from me to criticise RiverFront, but the firm has apparently chosen not to buy 2016''s red hot contra cyclical recovery sector commodities, currently led by precious metals.
Perhaps precious metals are regarded as too speculative for their customers, but is that really true? After all, gold and silver have been hard money for centuries; they were arguably oversold in January after approximately four years to the downside, and interest rates remain at record lows.
Additionally, many commodities and significant commodity shares have been recovering from exceptionally low levels this year and the latter often have excellent yields. This is not an unusual development since commodities often attract investor interest when bull markets in stocks are long in the tooth and losing upside momentum, as I have frequently mentioned this year.
A PDF of The Weekly View is posted in the Subscriber''s Area.
French Plot to Topple City of London is Foolish Bluster
Here is the opening of this informative article by Ambrose Evans-Pritchard for The Telegraph:
French leaders are openly plotting to peel off large chunks of the City''s financial industry as soon as Britain leaves the EU. This might prove much tougher than they imagine.
The plans conflict with far more important economic and strategic objectives of the EU, and some of the stated intentions violate existing EU law.
France is rolling out the red carpet for putative refugees from Canary Wharf, hoping to capture the lion''s share of the estimated 600bn to 1 trillion market for clearing in euro-denominated transactions. Some German officials are also eyeing the City, but more discreetly.
"There is a power play going on. It is very clear France and Germany will do everything they can to damage the City and get the business for themselves," said Professor Athanasios Orphanides, a former member of the European Central Bank''s governing council.
"But I don''t think anybody can kill the City that easily. The EU itself is so messed up right now and the eurozone is so fragile that any shock could tip them over the edge, and when it happens it is going to be non-linear," he said.
French President Francois Hollande has been notably combative, telling Les Echos that Britain will lose its vital right to commercial passporting ''completely'' the moment it steps out of the club. This clashes head on with France''s parallel policy of intimate defence ties with Britain.
He has also stated categorically that Europe will stop the City carrying out clearing operations in euros, adding for good measure that the Referendum result is irreversible. It is almost as if he welcomes the result for his own internal motives within the French political system.
Prof Orphanides, now at the Massachusetts Institute of Technology, said neither Paris nor Frankfurt have the skills or outlook to run an international financial centre of global scale.
"Whatever they try to do, they''ll end up shooting themselves in the foot and driving the businesses out Europe. The EU regulations are so costly that I think the City could actually see long-term benefits from leaving," he said.
The City is ranked number one in the Global Financial Centres Index, ahead of New York, Singapore, Hong Kong, Tokyo, and Zurich. None of the EU''s other hubs come close. Luxembourg is 14, Frankfurt is 18, and Paris lags far behind at 32, behind Calgary or Dalian in China.
The great unknown is whether London''s incumbency advantage is ''sticky'' in the fluid world of global finance. Chris Cummings from the industry lobby TheCityUK says it is hard to replicate a deep and established market.
David Fuller''s view
Most of the City''s financial institutions voted for Remain in line with their short-term profits. However, their longer-term potential should be greater under British regulation and the lower corporate taxes mention last week by current Chancellor George Osborne.
This item continues in the Subscriber''s Area, where a PDF of AE-P''s article is also posted.
The Markets Now
Monday 11th July at the East India Club, 16 St James''s Square, London SW1Y 4LH
David Fuller''s view
Note: Given the importance of Brexit and its influence on markets, I suggest we commence with a short interactive discussion on this topic before the scheduled presentations commence, if delegates agree.
Could we have a more interesting markets background to discuss on 11th July? I doubt it and am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club. David Brown will provide new material of considerable interest to long-term investors. Iain Little will also have some new material, in addition to his review of interesting investment trusts.
UK listed gold miners
Eoin Treacy''s view
Last year the Rand collapsed but gold prices were reasonably steady. With the fall in energy prices corporate profits of South African gold miners improved and with returning investor interest the Johannesburg Gold Miners Index turned to outperformance early this year.
The Index failed to sustain the break below 1000 in August then surged higher from early January and continues to improve in line with the breakout in gold prices. While that is in nominal terms, it is an impressive performance nonetheless.
First Solar Quits TetraSun in Shift to All Thin-Film Panels
This article by Christopher Martin for Bloomberg may be of interest to subscribers. Here is a section:
When First Solar acquired TetraSun, it was producing cadmium-telluride panels with maximum efficiency rates of 13.3 percent, the amount of energy in sunlight that''s converted to electricity. TetraSun had 21 percent efficiency at the time and the potential for improvement.
The company''s latest cadmium-telluride cell reached a record 22.1 percent efficiency in a laboratory. That''s higher than the best multicrystalline polysilicon cell at 21.3 percent, according to data from the National Renewable Energy Laboratory.
SunPower Corp., which uses a purer form of silicon, has the most efficient panels, with 24.1 percent.
''First Solar has achieved surprisingly good results for its thin-film technology,'' Jenny Chase, an analyst at Bloomberg New Energy Finance, said in an e-mail. ''First Solar may have felt there was little point in competing in an area where they have no unique advantage over other silicon manufacturers.''
Eoin Treacy''s view
The above story highlights how solar panel companies can become the victims of their own success. By purchasing Tetrasun, First Solar was hedging its development of a new product but it is arguable whether that would have worked since there are other cost effective manufacturers of those panels, not least in China. In such a highly competitive market, where the risk of new technologies evolving outside a company''s internal ecosystem is nontrivial, companies might be better off having conviction in their own products than competing on legacy technology.
U.S. Stocks Advance Amid Drug Maker Rally as Caution Subsides
This article by Anna-Louise Jackson and Bailey Lipschultz for Bloomberg may be of interest to subscribers. Here is a section:
''There was a big flight to safety trade earlier and a lot of that has reversed,'' said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. ''You''re looking at a market that''s lacking direction right now. The primary driver for concern is what it always is -- a slow growth backdrop. We''re in a no-man''s land before the next Fed meeting and the kick-off of earnings next week.''
American equities shook off declines in global markets, which fell as knock-on effects of Britain''s vote start to materialize. Anxiety has increased over the potential for instability to spread after at least five asset managers froze withdrawals from U.K. real-estate funds following a flurry of redemptions, while data on Wednesday showed German factory orders were unchanged in May, disappointing forecasters who had called for an increase.
Before yesterday''s decline, the S & P 500 capped its strongest weekly rise since November, boosted by assurances that central banks are prepared to loosen monetary policy to limit the fallout from Brexit. The benchmark is trading at 16.6 times estimated earnings, a higher valuation than the MSCI All-Country World Index and above its own three-year average.
Eoin Treacy''s view
10-year Treasury yields steadied today in the region of 1.38% amid a deep overextension relative to the trend mean. Some consolidation in this area is looking likely but with absolute levels so low there has been a surge into assets with the prospect for a higher dividend yield or dividend growth.
Fuller Treacy Money