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Brexit: now you see it, now you don't?

13 November 2019

Published 25 October 2019, this podcast explores Brexit and the possibility of a general election, if the US political impeachment process and trade war could trigger a recession, and whether the English-speaking economies and the rest of the world are fundamentally different, with Toby Cross, Head of Client Investment Solutions, and Will Hobbs, Chief Investment Officer.

Word on the Street

Word on the Street is a weekly news and financial markets podcast where leading investment experts discuss events that have been making the headlines. Each month we feature one of the podcasts online, but you can listen to all of the Word on the Street episodes by subscribing below.

Our experts

Will Hobbs

Chief Investment Officer

Will joined Barclays in 2005 and now leads the team focused on the core aspects of the investment offering. With nearly 20 years’ experience in the financial sector, Will frequently contributes to Bloomberg, CNBC and more.

Follow Will on LinkedIn.

Toby Cross

Head of Client Investment Solutions

Toby joined Barclays in 2010 and leads the delivery of Barclays’ investment expertise to our clients and customers.

Follow Toby on LinkedIn.

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Please note that past performance of investments is not a reliable indicator of their future performance. All investments can fall as well as rise in value and you can lose some or all of your money. Additionally, this podcast is not a personal investment recommendation.

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  • Welcome to Word on the Street a weekly podcast from Barclays UK where our experts help ordinary investors make sense of the latest news and events impacting the world's financial markets.

    This week, we discuss Brexit and the possibility of a general election, if the US political impeachment process and trade war could trigger a recession, and whether the English-speaking economies and the rest of the world are fundamentally different, with Toby Cross, Head of Client Investment Solutions, and Will Hobbs, Chief Investment Officer.

    TOBY CROSS: Hello and welcome to this week’s Word on the Street where I’m joined once again by our globe-trotting Chief Investment Officer, Will Hobbs. Will, you’re not in the studio with me today whereabouts are you?

    WILL HOBBS: I’m in Scotland on a holiday Toby, just on the west coast thank you.

    TC: Well I will try and keep it brief and then you can get back to some warm rain. You and a team–

    WH: It’s not warm rain up here, it’s cold rain.

    TC: But I’m sure it’s beautiful lest I offend any of our listeners in Scotland and I know that there are many. You and the team last week in the blog you compared the UK’s attempts to leave the European Union to the second series of Jack Bauer’s TV show ‘24’ starring Kiefer Sutherland as Jack Bauer. I’m not going to do it justice if I try and summarise it but perhaps you’d like to share with our listeners what you were getting at and how on earth you managed to draw a comparison with 24.

    WH: I’m thinking here the increasingly demented plot twists in 24 rather than the improvised torture sessions that Jack carries out with kind of various household devices in pretty much every episode, and particularly the theory to - I don’t know if anyone’s who’s seen it is a listener, Series 2 when the ever-gormless Kim Bauer, Jack’s daughter having escaped and evaded five to six individual consecutive kidnap attempt–

    TC: She’s kidnapped half a dozen times isn’t she in that series?

    WH: Easily, easily and then she escapes one kidnapper and she’s pounced on by a cougar. Now in this situation I think we can think of the withdrawal agreement as Kim Bauer and the cougar is being played by the Oliver Letwin amendment. And essentially what’s happened in the Brexit land is that the withdrawal agreement finally made it through Parliament in principle so it’s not a proper agreement, it wasn’t a meaningful vote. But in the subsequent vote, Parliament voted themselves more time to scrutinise the deal. So we were nearly there and then we were not.

    TC: So as far as the scenarios are concerned, where can we go from here, because pretty much everything we talked about last week has now been and gone, and it just goes to prove that no matter how much you try and predict... I mean pretty much nobody saw what was coming.

    WH: I don’t think I read anyone predicting, maybe I’m reading the wrong stuff, but I didn’t see many predicting the Oliver Letwin amendment. But anyway it’s happened, and again for the umpteenth time like you say we’re reminded, we’re taught humility by the Brexit process. But I think right now most people seem to be arguing that it’s time for a general election, obviously not according to the fixed term Parliament act of course, but we are in a period where the electorate is being asked to intervene a lot more than normal. We obviously don’t want to get into trying to call elections, as we pointed out before these are not areas where we see ourselves or anyone else actually having much of an edge. The polls do tell us that the Conservatives should win, but translating that into seats in the House or even a confident prediction is obviously problematic. I think the thing for us, though and I think this is something that we can do is take a step back and see that the chances of the UK exiting the EU without a deal have dropped sharply in the last few weeks. Now you know that avenue has not gone all together of course, but it looks a lot smaller than it was or even appeared in late summer and Sterling’s rise does reflect that story I think.

    TC: And that is of course very helpful. Is there any truth in the rumour that’s been flying around the office that the reason that you used the Jack Bauer 24 metaphor was because I bully so mercilessly about your obsession with 18th and 19th century history? You don’t have to answer. What you have done is proven is proven that you have more diverse interests than I’ve ever given you credit for. Now moving on, it’s been a slightly quieter week in non-Brexit news, although there was some pretty explosive testimony from the senior US diplomat in the impeachment investigations that was William Taylor. There are couple of spots of data here or there but I guess the questions to you, Will, is whether anything out there is materially shifted our views or made us alter our position at all?

    WH: It’s been an interesting week. I think probably at the margin, impeachment is looking a bit more likely, this remember is down to the Democrat-controlled House of Representatives is in their purview so that is more likely. But the actual removal from office of the president, which remember requires a Republican-controlled Senate say-so. So that’s kind of like they have a trial where the Senate is the jury and the supreme justice sits over it. That looks like much more of a stretch still, but we’re not done with the witnesses and the evidence gathering by the looks of things and it’s been done in real time. So keep an eye on opinion polls. Data wise, not too much new. We’ve had the kind of earliest coal mine canaries of the month, which are the Purchasing Manager Indices in Europe so far and the answer is that they’re not much different from last month, there’s no real change so far. It’s still subdued, the cyclical pulse remains weak but it hasn’t got any weaker and I think from our perspective we’d still say that a material further deterioration in the global economy looks unlikely. We still think that there’s really three things to keep in mind: one, the trade war pause is probably going to help the corporate sector find its feet again a little bit; the same is also true of point number two which is globally lower interest rates, which are also some stimulative, helping to provide again help the corporate sector to find their feet again; but also the third point I think this is important is still we don’t see the kind of imbalances that would require a major nasty recession, the kind of economic punishment that usually comes with that. So we are keeping an eye on the data very closely, but we still see the chances of an imminent recession in the next 12 months as well below 50-50.

    TC: Now, Will, thanks for that, that’s a useful summary. Would it be a good time to remind investors as you have said to me many times before that actually recessions are the norm not the exception. They are a normal part of any business cycle. But what happened back in 2007 shouldn’t be thinking about recessions with that in mind albeit it is a useful benchmark. But when you’re looking at the data when the team are analysing this what I’m taking away from your weekly summary to me is that even though the data is less positive, even if we do step into a recession, it will be likely a normal recession and not one of those sort of economic aberrations like we experienced back in 2007. Would that be a fair summary?

    WH: Yes, again the whole thing of this is I think the problem we have is a soothsayer problem isn’t it that people are always looking for someone who sees the future a bit clearer and so on. What we can just say is that the last recession like you rightly point out was at the extreme end of the spectrum, that’s not the norm like you say. But the other thing I think is that really investing is not about reliably avoiding recessions. If we could reliably avoid recession, it wouldn’t be just investors swerving out the way. It would be the whole business-government community. There wouldn’t be recessions if we could see them, if you think about it. So in the end investing is more about accessing ingenuity, do you know what I mean, inventions. So all of that stuff. You’re really just trying to focus on humankind’s continuing ability to invent new stuff and get better at using that new stuff, productivity. And that is really the main purpose of long-term investing. You’re just trying to get yourself available for that. And the problem with that theory if you think about it is that I don’t know when the next invention is going to come along. There’s nobody who’s going to predict ahead of a head of time what the big inventions are going to be, otherwise they’d invent them themselves. Again it’s just being in the game, being on the pitch, that’s the key.

    TC: And I think you and the team have written a number of articles which people can go and look at either on the Barclays Wealth website or on the Smart Investor website where you make exactly that point and the statistics around how much it costs if you miss one of those bounce backs and the cost of trying to time the market versus just having broad exposure. Now earlier on I mentioned the recession of 2007. The downturn in markets we saw was obviously before I get attacked in the comments section. One final thing to bring out with you or certainly one of the latter things, I wanted to dive into something a bit more detail that you mentioned last week to me. You pointed out that the UK and many European economies belong to two totally different types of economy. But over the weekend the question came to me in an uncharacteristic bout of cerebral reflection I might add, I felt like you for a moment. I was thinking wouldn’t it be in a case that in other currency unions you could say the same thing. So whilst you were making the case that different parts of Europe have very different economies, wouldn’t that also be the case for let’s say for example Wyoming and California?

    WH: Yes. It’s actually an interesting point. You have a very tragic weekend if you’re thinking about this obviously

    TC: I always I think about you on the weekend.

    WH: It’s the podcast, clearly. I think that the point you make about you make about Wyoming versus you know Wyoming and California being very different states, we don’t want to deter us allow that alone to deter us from currency unions because obviously the US does have a lot of very different states, all operating at different economic trajectories with different debt loads, all those kind of things. But I think the point here is that the differences go a bit deeper. And this is really about the overall, it’s almost totally different modes of organising your systems of production and configuration of your institutions and all those kinds of thing and basically the UK and the US, Canada, the English-speaking world, belongs to a different group than to Germany and the Rhineland and those kind of areas.

    TC: When you talk about the system, are you talking about things like political and educational systems?

    WH: Yes. I think it goes down to that and the way I always think about it almost is just business relationships. It’s the way that business relationships are treated. And if you think about business relationships that is everything between, including like the company to the employee, between buyer and supplier. Now in the Anglo-Saxon variant, business relationships tend to be quite easy to both enter and exit. Such economies tend to be therefore quite good at quickly mobilising or demobilising resources to produce like radically new products or if these products don’t work to fold up shop. Now in the Rhineland version which incorporates the likes of Japan, such relationships tend to be significantly stickier. So here economies tend to produce and benefit from a more highly skilled workforce which tend to be better equipped to make products that benefit from incremental improvement other products themselves or indeed the production processes. So it is very different in the way that affects everything, in the way that you educate your workforce and even it goes to how you vote essentially.

    TC: So would that explain to not wanting to oversimplify but when I think back to the way the market reacted in 2008 one thing that surprised me equally was the speed of recovery of for example the S&P which corporations, really very large companies were able to cut balance sheets, exit work, now obviously you had huge unemployment as a consequence of that, but companies were able to restructure themselves really very very quickly. What it sounds like you’re saying is that that is not the default case around the world?

    WH: Well that’s a really interesting point. The great financial crisis is such a different event. If you think about it one of the problems you have there is that, and the reason why profits declined so sharply, and remember the decline in corporate profits in the US was sharper than you saw in 1929. It was bigger than, worse than the Great Depression and because what happens is you basically impair assets on these sectors with the largest balance sheet, so the financial services sectors and those with financing arms, all that kind of thing, and you run this huge loss. And obviously if anyone who knows their accounting will know that once you start getting a loss on the balance sheet, you then have to run it through the profit and loss account on a one-year basis. But what happens is that destroys profits on the first year but then obviously you get a very easy comparison for your next year. So while profits decline 90% on the first year ie 2007-2008 they then bounce back 900% just arithmetically afterwards. In a sense the shape of the recovery, the immediate recovery was driven almost arithmetically by that bounce-back in profits, just because of the nature of the crisis. So there are some elements to learn from the previous example and transposed them on to this and I think the US corporate sector did get back on its feet very quickly and they were much quicker to act than some parts of Europe. And that may have something to do with the way politics is run in the US and in the UK. So over in the US and the UK it is more majoritarian system, so you get the ability to kind of act a bit quicker I guess sometimes, there could be a benefit from that, although you also get big swings in political direction as a result. But in the more consensual European systems, what you tend to find is that no singular vision is pushed into office without the agreement of others. So policy tends to steer as steady, a more predictable course as a result and that provides the more comfortable backdrop for the kind of intergenerational bargains that the European countries require more because of the structure of their labour force, the nature of their education, the way they make products, all that kind of thing. So you can see there’s linkages throughout all of it. It’s fascinating when you get into it. I’m sorry I’ve already bored on a little bit too much about it but I’ve written an article about it if you are up for being more bored.

    TC: I’m always happy to be bored by you. But no, it is a fascinating insight. I wasn’t aware how different what ostensibly I would believe are similar nations could be from an economic perspective. So it is a good article and I would commend it to anybody. Please have a look at the website and dig it out. Will, I’m conscious of the fact that this is your vacation I’m eating into, so I’m going let you get back to the windswept beach lands of Scotland. Look we’ll keep an eye on the data, we’ll keep an eye on Brexit, and we’ll make sure we’re back in touch with you and the team to help our listeners understand what’s been happening in Word on the Street this time next week. Thank you.

    All investments can fall as well as rise in value and their past performance is not a reliable indicator of a future performance. This podcast is not a personal investment recommendation.