The Weekly Update

Last week, five months to the day since the EU referendum, Chancellor of the Exchequer Philip Hammond delivered the first Budget of the Theresa May Government; the first Autumn Statement to the Commons in light of Brexit. In brief: GDP growth forecasts lower by 0.8% and 0.4% for 2017 and 2018; planned borrowing to increase by £122bn for the next 5 years; some slender support for renters and affordable housing; some mollifying policies for the ‘just about managing’ or JAMS increasing the ‘national living wage’ and tempering some of the Universal Credit reforms; corporate tax will be cut to 17% along with a wide range of new tax reforms; and new fiscal targets of a 2% deficit with debts falling by 2020. Markets saw inflation expectations surge higher; also sterling rallied to 1.2435 during the statement but then fell to 1.2360 before the end of the statement as US data came out.

Before today, Chancellor Hammond had already referenced the UK’s ‘eye-wateringly’ high debt levels, yet today confirmed that borrowing for the next 5 years will increase a further £122bn to fill the black hole that has become apparent since the Brexit vote and increase in debt interest costs, however it will also help to fund a £23bn new ‘national productivity investment fund’ which will incrementally fund projects from transport infrastructure to high-tech innovation.

Perhaps an interesting technical oddity we noticed is the budget no longer misleadingly accounts for pseudo sterling gains from hedged foreign currency reserves when calculating the Public Sector Net Debt (PSND). Previously it had included such gains in sterling terms on the assets whilst omitting the corresponding losses from the hedging derivatives (from sterling weakness) because of odd Eurostat guidelines; last year this accounted for around £10bn that would have never materialised in the National Accounts and could have perhaps been even more significant for the recent months following Brexit and sterling weakness.

Another take on the UK finances since the Brexit vote comes from Credit Suisse’s 2016 Global Wealth Report which estimates that UK household finances are $1.5tn worse off, equivalent to an average $33k reduction in value of accumulated assets per adult. Should Anglo policies continue to diverge alongside potential Trumpflation this in-dollar-terms write-down may just be the beginning for UK residents and investors. The report also calculates a $3.5tn rise in global wealth to $256tn but that this ‘wealth creation has merely kept pace with population growth’ for the first time since 2008. With such population growth slowing and the risks to global trade increasing, overall global growth faces strong downward/sideways pressures that regional pockets of fiscal stimulus and infrastructure spending will likely do little to offset.

With Brexit and the election of Donald Trump as US President, 2016 has been a year of political change, perhaps even revolution. Populist politics is seemingly the new zeitgeist as voters have vented their dissatisfaction with rising inequalities blamed on globalisation and more liberal policy agendas instead favouring more conservatism and protectionist approaches to areas such as immigration and potentially trade. This trend is also spreading to Continental Europe where the Italian referendum on constitutional reform is due on December 4 but could end up being a protest vote against the incumbent government and ‘economic malaise’. The ongoing primaries for the French Presidential Election next year are also sowing the seeds for a departure from the status quo with François Fillon, who comfortably won his party’s primaries on Sunday, predicted to easily win the presidency based on current polling. The clear message is that people in France are dissatisfied and frustrated with the status quo. With 283 terrorist related deaths since January 2015, an unemployment rate still around 10 percent, momentum looks to be with the candidates offering change.

Whether politicians can actually make a real difference to ageing so-called “developed” economies, is debatable. Against a backdrop of shrinking populations, growth will be very difficult to come by in many countries over the next decade or two and continual political change being a likely consequence. That is not true for all countries though with those running current account surpluses, with strong NFA positions and faster growing populations being the obvious candidates for bond investors looking for attractive alternatives.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.