June Newsletter: ‘When things are bad, it’s usually a good time to invest’

22 June 2023

As you know, at MVAM we don’t like letting anniversaries of significance go to miss, like last month’s newsletter about the 300th birthday of Adam Smith. This month comes an anniversary we are less keen on. Yes, it’s the 7th anniversary of the Brexit vote. MVAM holds no political persuasion, but we have always been pro-EU.

Sadly, our scepticism on ripping up the fabric of one’s own society without a plan of how to knit another one together seems to be coming to fruition. Its true impact can be seen in little ways. This week the World Health Organisation adopted the European Union’s covid pass system for the entire world. The UK developed, and of course paid, for its own so called ‘world beating’ solution. Had we remained in the EU we would have shared the cost of development with 27 others and really had a world beating solution.

A second impact can be seen in how difficult it is for us to be the base for large companies anymore. Look at the number of cars the UK produces – that hit 1.7m in the year of the Brexit vote. It was 775,000 in 2022 – a staggering fall. It’s hard to convince a car maker to invest here in the UK when an unfettered market, four times larger, can be gained by locating a factory as little as 25 miles away from our shores!

A third impact is the cost for us to borrow money, to fund the infrastructure, healthcare etc we need. Back in 2015 we wrote a newsletter titled “What a Meze’ (Read here) that highlighted the debt problems of Greece as its bond markets and borrowing costs soared. The country was in turmoil. Recently it has started to cost the Greek government less to borrow money than it does for the UK government! The Greek government can borrow at just 3.75% for 10 years. For the UK, it’s 4.5%. Quite a turnaround. We are not saying the UK is in the predicament Greece was in in 2015, but it seems to help to be part of a club…

So, the implications of that vote seven years ago seem to be coming clearer. These three examples just underline the main impacts: Fewer economies of scale, no real free trade, and the cost of borrowing higher than in most other similar countries. And we wonder why we have high inflation!

But for investors in the UK markets things may be more promising. With crisis comes opportunity. Had you been an investor at the time of the Greek crisis we highlighted in March 2015, you would probably have put your money into safe UK bonds rather than the Greek ones. However, returns since then suggest taking the risk would have paid off. A Pound Sterling invested in UK bonds in March 2015 would now be worth just 88p. A Pound in Greek bonds would now be worth £2.90. Greek bonds have outperformed UK bonds by over 200% since that newsletter. And no, we didn’t buy Greek bonds either. But with UK equity markets looking lower in value to world peers than at any time in history, can we draw comparisons? Probably. After all, investment returns, it seems, may be impacted more by their underlying value than a country’s failures.

As for Brexit, what a ‘Meze.’