By Peter Lundgreen, the Founding CEO of Lundgreen’s Capital
Teaser: Long before the Covid-19 pandemic, the British economy was already in troubled waters due to the ongoing Brexit disputes, but the Covid-19 havoc should have knocked out the country.
Since the Brexit vote on the 23rd June 2016, the British economy has been feared to be headed towards huge troubles. Of course, the Brexit itself was seen as an enormous threat, then the missing international trade agreements as a consequence of the Brexit, and finally, the Covid-19 crisis that spiralled out of control.
But the United Kingdom, including its economy, is still standing, and in fact, moving faster forward than many had forecasted, though maybe all positive expectations are already priced in the British stock market.
Since the Brexit vote about five years ago, it has been my view that a final decision and clarification about UK’s future should finally be done, before an investment allocation towards the kingdom was the right timing.
That precondition for initiating an allocation was basically achieved on the 1st January this year, with the agreement between the EU and UK. One could claim that the agreement is the slimmest solution possible, as the Brexit, in reality, is not finally negotiated to its full extent. For me, the first part of the agreement after all, was the long-awaited go signal for the increased allocation towards Britain, although the Brexit agreement still partly remains open.
In focus, I always had companies in the FTSE 250 league, i.e., numbers 101 to 350 of the listed corporations, but it seems that other investors also had the same thought, as this index has, by far, outperformed the leading FTSE 100 index. In the past 12 months, The FTSE 250 index has almost performed just as good as the US S & P 500 index, which isn’t bad at all. A critical assessment and also a fair view is that as so many investors have apparently waited for this signal to increase allocations towards UK, that one could call the move for a “Brexit pop”, inspired by the “IPO pop”. With this expression, I mean that after the awaited event, there is a market reaction, and after a period, the reaction eventually fades out.
This concern could be worth a fair consideration primarily because of the Covid-19 crisis, particularly around New Year, when the virus wreaked havoc in Britain, including the economy. That alone naturally impacted the economy the most at that time, but it is also becoming more likely that the Covid-19 crisis will change life and economies more than expected. Thus, the unknown factor about new trends is still significant, because the British society was so badly hit by the Covid-19 pandemic.
I am not certain if the world has seen all new or enhanced trends after the Covid-19 pandemic, as the pandemic isn’t over yet, not even in the western countries, where vaccinations have been going on for the longest time.
Within the coming 12 to 18 months, I expect some surprising trends to emerge in societies as an effect from the Covid-19. On the other hand, it is my expectation that the financial markets and investors will adjust to those possible changed trends.
It leads me to focus on, what I would call the basic and strong forces when considering the British economy and further investment flows in that direction. Referring to the many good economic data that currently origins from Great Britain, like the unemployment rate that already is down at 4,8 pct. Still not at historical lows of 3,8 pct. from before the pandemic, but the unemployment rate is dropping at a fast pace. Even faster is the consumer confidence rising to levels from before the Covid-19 crisis, which I pay heavy attention to.
The vaccination programme in UK is truly ahead of the rest of Europe and is therefore longer into the new era post-pandemic. This includes a higher speed towards growth, where the domestic growth and demand is the exciting part.
For years, international investors were significantly underweighted in the allocation to the British stock market. To a great extent, this is the explanation behind the upward move in, for example, the FTSE 250 index, though when studying different allocation surveys, I still regard global investors as underweighted British assets. Global investor inflow is still a positive argument, which now needs to be combined with the accelerating domestic economy. I consider this cocktail as one of the most progressive among the European economies, as the Eurozone remains in a slower and early exit from the Covid-19 crisis. It also means that when I consider Europe, I keep my view that Great Britain remains in the lead as an investment destination.
