SOME Brexiters seem to be taking the view that dizzy heights for the UK stock market mean Mighty Blighty’s economy is in fine fettle after, or even because of, the vote to leave the European Union.
Little could be further from the truth.
Yes, the UK’s FTSE-100 index of leading shares recorded a 14-month closing high of 6,941.19 on Monday, after eight straight sessions of gains.
But the UK stock market has been climbing in large part on the back of the economic emergency the Brexit vote has created – notably in terms of the dramatic monetary policy measures taken in an attempt to fend off recession.
These measures have included a quarter-point cut in UK base rates to a fresh record low of 0.25 per cent. The scale of the Bank of England’s quantitative easing programme of Government bond purchases, aimed at stimulating the economy, has been hiked by £60 billion to £435bn.
And the Bank’s Monetary Policy Committee has launched a £10bn corporate bond buying programme
As if all of that were not enough, the Bank also made it clear MPC members stood ready to cut base rates even further at a future meeting, to “a little above zero”, should incoming economic data be broadly consistent with the Old Lady of Threadneedle Street’s latest August inflation report forecasts.
It is hardly surprising we have seen plunges in gilt yields to fresh record lows as a result of the diminished economic prospects after the Brexit vote and associated monetary policy moves.
This tumble in gilt yields has increased final salary and other defined benefit pension scheme deficits still further, and sparked very understandable debate about whether companies should be paying such big dividends to shareholders when there are black holes in terms of their employees’ retirement provision.
Actuarial firm Lane Clark & Peacock’s annual Accounting for Pensions report this week signalled FTSE-100 companies pay around five times as much in dividends as they do in contributions to their defined benefit pension schemes.
There also appears to be plenty of potential for a much wider debate about what is an appropriate split of things between employees and shareholders of a company in these straitened times.
Aberdeen oil services company Wood Group, which has in recent times been embroiled in a dispute with unions over cost-cutting moves in what are undoubtedly tough times in the North Sea, defended the decision to raise its interim dividend by 10 per cent.
Chief executive Robin Watson said Wood committed to the dividend policy in 2014 to “take the dividend level back to one we felt was peer comparable”.
The surge in the UK stock market looks in large measure like a fairly mechanical reaction to the much looser monetary policy environment and outlook in the wake of the Brexit vote, as the Bank of England aims to fend off recession. And it reflects the increasing trouble people have in finding any kind of decent return at all on cash or bonds.
The stock market rose in anticipation of, as well as on delivery of, the monetary policy measures.
What is perhaps most alarming of all is that, even before the Brexit vote, the UK had been unable to mount any kind of convincing and balanced economic recovery even with base rates at a then record low of 0.5 per cent.
The extent and crucially also the mix of the Conservative Government’s foul-tasting austerity medicine ensured that demand in the economy was choked off as those who have to spend all of their money to live were hit by hikes in value-added tax and savage welfare cuts. This folly has ensured that the UK’s public finances have remained in grim shape. Like a company obsessed with cost-cutting, there seemed to be a distinct lack of focus on the top line by former Chancellor George Osborne and tax revenues therefore suffered.
However, while things were grim before, they have got a whole lot worse with the June 23 referendum vote. Whatever the Brexiters might tell you.
Aberdeen Asset Management’s Bruce Stout, manager of the £1.6 billion Murray International Trust, declined to give a view on the likely impact of the Brexit vote on the UK economy when speaking about MIT’s interim results this week. He noted there was “no roadmap for this”.
However, signalling a firm view the UK economy was in something of a jam and had been for years, he said: “Pulling rates down and down and down and printing money is not a solution to anything. It hasn’t been for seven or eight years now. Still they do it.”
Speaking on Wednesday, he asked why companies would continue to pay out high dividend yields when the yield on a 10-year gilt was only 0.56 per cent.
MIT now has nearly 90 per cent of its net assets invested overseas, and benefited from the plunge in sterling after the Brexit vote. About 15 years ago, it had about 40 per cent in the UK.
In short, the international trust sees more attractive places in which to invest than in the UK, and benefited from its overweight positions in Latin America and Asia in the six months to June.
Mr Stout said: “One of the biggest issues you have is there is nothing familiar about the UK or Europe any more. They have just run out of all fiscal policy options, all monetary policy options. The UK over recent years has become a hostage to foreign capital.”
This does not sound like the Mighty Blighty so celebrated by the Brexiters and all their bunting.
As the FTSE-100 was climbing to its 14-month high on Monday, sterling was trading at its worst levels against the euro for about three years and was below $1.29. While it has since edged back above $1.30, we should keep in mind it was close to $1.50 on June 23.
If the Brexiters want a true indication of the world view of the state of the UK economy, it is the pound’s weakness they should be observing.
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