EDITOR'S LETTERMerryn Somerset Webb
When Philip Hammond made his first few budget speeches as chancellor, he promised that – in stark contrast to his showy predecessor, George Osborne – he would return to having one big budget speech a year in autumn, with the spring edition reverting to being little more than a quick progress report.
He stuck to the script this week, although I have a sneaking suspicion that this was more by necessity than by choice. Hammond was speaking the day after Prime Minister Theresa May’s Brexit withdrawal agreement had been rejected yet again by the House of Commons. What with all eyes focused on Brexit, the chancellor was reduced to dangling a carrot in front of various government departments. They can look forward to more cash in the near future – but only so long as the politicians get their act together and agree on a deal with the European Union (EU).
Technically, May’s latest rejection means we’re still on course to leave the EU outright on 29 March. Yet so far, markets appear to be shrugging it all off. Even the pound – the most sensitive asset to Brexit talk – has been fairly sanguine this week. At first that might seem surprising, particularly given the somewhat hysterical “lettuce shortage” headlines that the prospect of a “cliff-edge/clean” (delete according to your voting preferences) Brexit has inspired. It’s easy to forget in these politics-obsessed times that markets often quite enjoy political gridlock – when politicians are tied up squabbling over other things, there is less time for them to do anything that might mean major disruption for businesses.
And in the UK, we are most likely nearing the point where it’s all about the admin. By the time you read this, there will have been approximately another half a dozen (I may be exaggerating – I hope) votes on Brexit and amendments on Brexit and amendments to the amendments on Brexit. But unless something very surprising indeed happens, it’s all pointing to a massive fudge of exactly the sort that always envelopes any negotiation that involves the EU.
I suspect the next step will involve delaying the date of Brexit – probably until just before the European elections, which will be presented as the “final” final deadline. And if May’s deal can’t scrape over the line by then, there will be another extension, and so on, until the Commons agrees on Brexit or there’s a fresh general election.
Investors shouldn’t get too comfy. Gridlock will end, and when it does, it’s clear that our politicians are gunning for companies on several fronts: share buybacks are a hot topic in the US, while the tech giants aren’t getting any more popular (in his spring statement, Hammond said he will ask for a competition review of the digital-advertising market). But if you focus on assets that are cheap; domestic rather than global in focus; and you avoid the most politically exposed sectors (housebuilders, say), then, as Christopher Wood of CLSA nods to, the main risk for UK assets might not be that they have a lot further to fall – but that they recover faster than you expect.
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