The other ‘Beast from the East’

I am writing this in my office at home with snow swirling outside as Storm Emma approaches form the South West. Yesterday Storm EU came in from the East with a threat of annexing Northern Ireland – a new EU proposal that would create a customs border between Northern Ireland and the rest of the UK if no agreement is forthcoming on the Irish border issue.

No warming in relations with the EU

Whether you are a Brexiteer or a Remainer this EU rhetoric is not helpful. While I’m not predicting a UK recession, this will only add to other early warnings signs that one could be coming. I have been warning of this heightened risk for a while and have positioned our funds accordingly. In my opinion this latest development only heightens the risk by potentially pushing the two sides further apart and creating further uncertainty for the UK’s future.

Against the good news that Toyota will build its next generation Auris at its Derbyshire plant, we see two more retail names collapse, Toys R Us and Maplins. Homebase is in trouble too, while other household names continue to struggle and Visa noted a fall in spending by UK consumers in 2017.

Now I don’t doubt Toys R Us and Maplins are further victims of disruption and poor management. However, the scale of retail slowdown can’t all be down to the Amazon effect. Real wage growth in the UK has been negative for a significant period of time and availability of credit can only hold off this effect for so long. The prospect of higher interest rates, higher taxes and sustained inflation could be starting to bite.

Will investors grow cold toward Europe?

Economic forecasting is always difficult. I never believed Project Fear prior to the referendum nor did I believe the “nothing to worry about after all” brigade only six months post the vote. There was always going to be a delayed reaction. I do not pretend to know the outcome any more than anyone else, but I am worried that the almost incoherent political approach in the UK coupled with the continued unhelpful language emanating from EU bureaucrats will ensure investors outside this continent decide to postpone any investment, direct or securitised. 

This latest development is not good for the UK and hardly helpful for Europe. Merkel is also under pressure in Germany and the Italian election could provide further complications. The rest of the world must look on in wonder.

So I am afraid it’s more of the same from me. Focus on the US, Japan and Asia Pacific for growth. Build up government bonds in Europe on weakness to combat the threat of recession and avoid European and UK domestic earners.

To use a cliché, the canaries are still and it’s not due to the freeze, at least not the weather-related one!