The world has become a much more dangerous place in the last few years. Vlad the Invader set the ball rolling with his special military operation in Ukraine two years ago. The West’s military support for Ukraine was prompt and continuous but did the US, UK and, particularly, the EU envisage the war going on for so long? Probably not. Throw into the mix the Hamas attack on Israel last October, an attack so horrific that there was really only one way a Netanyahu led Israel was going to respond, and it is easy to assume it was Iran inspired. If so, the Ayatollahs have succeeded in turning half the world against Israel and promoted a great deal of civil unrest on the streets of western cities. Israel too received prompt military support from the West although this is wavering in the wake of the ongoing operations in Gaza.
The question is, how long can the West continue to support two very expensive wars when most are already highly borrowed? There are NATO members that have not spent the requisite minimum 2% of GDP on defence and in the UK, the Army, Navy and Airforce have been hollowed out during the long peaceful years. At the same time our infrastructure is severely strained. Roads are a mess, the rail system likewise. The water industry has been stripped of funds by overseas raiders and now those funds are desperately needed for repairs and upgrades. Fourteen years of government that has been Conservative in name only, has left us a highly indebted and highly taxed country. For all this to be tackled growth is necessary and not just the minimal levels we have seen in recent years. 3% to 4% is necessary for a fairly prolonged period. Liz Truss had this in mind, but the execution was terrible and the fearful establishment snuffed her out quickly.
However, the whole episode, in which Liz Truss tried to ignore the existence of the Office of Budgetary Responsibility, begs the question – why must successive Chancellors be beholden to the OBR when its forecasting record is so awful? It very rarely gets anything remotely right and yet the Chancellor must adhere to its numbers for fear of upsetting the markets. The Treasury’s economists aren’t a great deal better. The answer for whoever inhabits Number 11 next, if they want a real growth economy, must be to find a way to both break the hold of the OBR and destroy the group-think regime in the Treasury. It’s hard to see anyone capable of that in the current cast list.
Meanwhile, the overseas raids on our companies continues because our stock market is rated so cheaply. These have, thus far, been focussed around the FTSE 250 stocks and it has been exacerbated by companies moving their listings overseas, particularly to the US, where they should be valued more highly. The government fiddles around the edges of the fundamental problems while our stock market disappears. We are now seeing companies at the small end of the market giving up their listings as they feel they will be better suited by being private companies again, the costs associated with the listing and lack of liquidity being the main concerns. This has led London broker, Peel Hunt, to write that unless the Chancellor (or more probably, his successor) introduces radical reforms, the FTSE Small Cap Index will cease to exist by 2028. Couldn’t agree more. £5k extra for a UK ISA doesn’t cut the mustard, plus it has been kicked into the long grass until after the election. They must think bigger and be braver, whoever they turn out to be.
For the investor – stick to undervalued quality. If the company doesn’t move abroad to gain a more valued listing it will probably be bought and taken there anyway. Either way is a winner but where it leaves the UK stock market in five years-time is anyone’s guess.
