UK Economy and U K Equities
Last year the British pound sterling fell heavily after the Brexit vote. Britain’s population voted to leave the European Union.
Are UK equities worth buying? The FTSE 100 index is one of the worst performers of the major stock markets, rising only 2.8% so far this year. That’s not keeping up with earnings, which have risen 5% on average.
The price earnings ratio of the index is around 28 times, which is far from cheap. Within the index we can find huge disparities between the p/e ratios. For example, Centrica plc, a UK electricity company, is on a price earnings ratio of jut 8.6, with a yield of 8.33%. That seems cheap. On the other hand, Shire plc, an Irish/UK biotech is on a p/ebratio of 68 with a yild of just 0.62%. That seems expensive.
Before we explore UK equities any further, let’s pause, and look at the statenof the UK in the light of the upcoming Brexit.
As far as the UK economy is concerned, it’s hard to make a call. A year from now, we’ll still be struggling with Brexit.
Within the UK there is a generally gloomy outlook and many traditional businesses are struggling. Some retailers are saying that there will be no Xmas this year.
House prices seem to be stuck and there is little activity.
Many Brits feel angry with the government. They feel they were lied to.
Businesses and individuals are feeling that taxes have become excessively complicated, and that bullying tactics are being used to extract more than the fair share.
There is plenty of talk of leaving the UK. The weather is hardly going to keep people in.
There’s a general feeling that the opposition Labour Party leader, Jeremy Corbyn will soon be the next Prime Minister. He’s generally seen as a socialist. That’s an understatement. Plenty don’t hesitate to call him a communist. They say that if he gets in, “Britain’s finished”.
I wouldn’t rule out the risk of re-nationlisation of some of Britain’s industries. If you are investing in the UK, stick to industries which would be of little interest to a socialist government.
Despite the doom and gloom seen from within the UK, many international individuals and companies see its attractions. It’s a country with an understandable rule of law, acceptable infrastructure, and a cheaper currency. Perhaps one of the key attraction of the UK to Indians, Asians and Americans is language. They want to speak English, not French.
Taxation is a big area of concern for UK companies. It’s hard to see tax cuts. Yet that’s exactly what Britain needs if it is to attract international businesses, and to stop the brain-drain.
Overall, Britain faces uncertainty for several years, in a climate where it does not look like things are improving. The smart and mobile are talking of leaving. These factors are generally going to weigh on the UK equity market.
As a global investor, there are many places which have less uncertainties and better prospects than the UK. I would be underweight UK equities.
It is interesting to learn what happens in other countries through your publications, I learn every day. I have seen comments from people talking about bad politics in the UK. I recently saw a movie that moved me a lot and talked about bad policies that the government of that country has implemented.
Hello friend, in my country it is very late at night, I am awake doing the post tomorrow, what is wrong in the Realms, I hope that so many problems are solved and a good political leader arrives, God puts and removes Reyes. but people are the ones who decide what they want. Greetings friends, I hope you have understood my message.
Based on your article, prospects in the UK are not very bright. And I agree with this. I enjoyed reading your article and will read them further. Thank you for continuing to write.
The UK along with most developed economies is suffering from a mammoth national debt. The UK could well be the first to do a currency reset, using the Brexit cost as the excuse. At some point I will explain in layman’s terms how a currency reset will have global benefits.
Thanks for your reply. I think I understand you. Restarting the national currency can be very beneficial to the state. But, ordinary citizens often lose a lot on this.
Basically a currency reset is like handing a few thousand pounds to every citizen. It’s not that at all, but the effects are similar for the ordinary citizens. A currency reset has more benefits than just doling out free cash.
Thanks for the detailed explanation.
A currency reset will benefit most. Lower taxes, lower mortgage payments, low debt servicing costs, more jobs, more spending, lower inflation, much much higher Stock markets.
Losers:
It will be a disaster for holders of gold and cryptocurrencies,
Make no money:
It will do no good to those who hold millions in bonds or cash, like pension funds and foreign governments, speculators, and billionaires who hold cash or bonds. They won’t lose anything, they will just miss out on the profits.
I think that UK had a lot of courage for making the decision to exit from EU,
and some other government would like to do the same thing and don't have the courage to do it.
Now UK is into a major phase of uncertainty I also believe that this is a difficult process and will of course take a long time; on the other hand, however, UK needs to take a number of decisions today, because this situation only increasing the sense of disquiet.
Labour are talking about rolling out a land value tax. Using this to replace things like income tax, corporate tax and VAT would be an extremely good move. Most people would end up paying less tax, while corporations and the super rich wouldn't be able to evade it by declaring their incomes in offshore tax havens. I think that the post-Brexit future is looking brighter.
Land tax? They used to have a windows tax in the UK. Nobody wanted to buy a house with too many windows. End result was the windows got bricked up or the house pulled down.
Next thing will be a tax on pleasure. The more you like the UK, the more you’ll pay.
A land value tax is a tax on the unimproved value of the land and not the buildings on it. Property taxes, such as the window tax, are a disincentive to constructing 'improvements' to the land. A land value tax has the opposite effect.
This 6 minute video provides a good introduction.