Will the ‘Boris bounce’ fall flat?
March could be a big month for the UK stock market. Advisers and clients continue to await news on the spread of the COVID-19 virus and whether containment and quarantine policies are starting to work; the Bank of England will formulate its first monetary policy decision under its new Governor, Andrew Bailey, on 26 March; and the new Chancellor of the Exchequer, Rishi Sunak, will outline the fiscal policy plans of the Boris-Johnson-led Conservative Government on 11 March.
How the viral outbreak develops is still anyone’s guess. The profit warning from Apple suggests the illness is starting to have a negative impact on economic activity, although markets still seem to be leaning toward the view that any effects will be relatively short-lived, as was the case with SARS in 2002–03, and that the world is not on the brink of the sort of apocalypse witnessed in John Wyndham novels.
“The Bank of England still seems more inclined to cut interest rates rather than raise them, although the arrival of a new Governor could change the tone, as could both fresh economic data and Government policy.”
The Bank of England still seems more inclined to cut interest rates rather than raise them, although the arrival of a new Governor could change the tone, as could both fresh economic data and Government policy.
On the policy front, economists seem convinced that Mr Sunak will oversee an increase in Government spending as the Government prepares for the ending of the Brexit transition phase on 31 December and looks to cement its current popularity in the seats won in last year’s General Election.
In terms of the economic data, there have been some tentative signs of improvement and it will be interesting to see whether the latest batch of purchasing managers’ indices for the manufacturing, construction and services industries – coming out between 2 and 4 March – show additional momentum or not.
February’s improved PMI surveys hinted at improved momentum in the UK economy
Source: IHS Markit/CIPS, Refinitiv data
There are four main moving parts to any country’s GDP data, at least from a pure accounting perspective. They are:
“While advisers and clients may not be accustomed to receiving too much good news on the UK economy, this is perhaps one reason why upside surprises cannot be ruled out – although the COVID-19 virus and trade talks between Britain and the EU remain influential wild cards.”
While advisers and clients may not be accustomed to receiving too much good news on the UK economy, this is perhaps one reason why upside surprises cannot be ruled out. Granted, the spread of COVID-19 and the manner in which trade relations develop between Britain and the EU remain influential wild cards, but it is quite possible that consumer spending, business investment and Government expenditure will all rise, if left to their own devices.
Low savings rate could yet hobble consumer spending
Source: Office for National Statistics
Business investment could be about to pick up
Source: Bank of England Agents’ Summary of Business Conditions report, Q4 2019
“Growth in Government spending looks set to accelerate, at least if the ejection of the apparently fiscally prudent Sajid Javid from 11 Downing Street and the decision to press ahead with the HS2 rail project are any guide.”
However, the OBR did expect the negative impact to shrink in 2020 and beyond so it will be interesting to see how the OBR’s forecasts change from a year ago when the next Budget is released on 11 March.
Cut-out-and-keep guide to OBR forecasts for the UK economy
Source: Office for Budget Responsibility, March 2019
Ups and downs
If this column was forced to guess, Government spending could provide the greatest upside surprise, and trade is perhaps the biggest risk, with the overall scope for surprises slanted to the upside. If so, that could favour domestic-facing stocks over the multinationals of the FTSE 100, although, as Warren Buffett once commented: “Forecasts tell you a great deal about the forecaster; they tell you nothing about the future”.