Focus on fundamentals: Politicians and policies come and go, but it is the economy that drives the stock market – and nothing else, says Russell Taylor
Set against a backdrop of a renewed fall in sterling, the first week of October saw the FTSE 100 index near a record high. Sterling then plunged sharply in Asian markets on 7 October – a faulty algorithm according to some sources, a misreading of the Conservative policy on Brexit according to others.
Politics or economics
Whatever the cause, the episode shows the eagerness of dealers – whether robots or humans – and their difference from regular investors. Stock markets are not moved by politics, only money. The pound’s fall from 1.30 to 1.10 against the euro is bad news for skiers preparing for their holidays, but good news for business.
Nissan manufacturing cars in Sunderland is immediately better off compared to VW in Wolfsburg, while small and medium-sized enterprises will find that their continental competitors’ products are now more expensive than their own.
This is one of the benefits of floating exchange rates, whereby currencies can adjust to the movement of competitive forces. We no longer live in the world of old-style devaluations encapsulated by Harold Wilson’s infamous ‘pound in your pocket’ comment during the sterling crisis of 1967.
It is a short-term tonic, one that allows economies and politicians to adjust smoothly and quickly – and very welcome because of the profound changes now facing the British economy.
Preparing for change
It is the economy that will determine the course of the FTSE 100 and other, related, indices. Companies will either make good profits, so pay dividends to their shareholders, or they cannot. Despite the increasingly global focus of our largest indices, to a large extent this is still determined by demand within the domestic economy.
Brexit is the end of the UK as the preferred choice of foreign inward direct investment – the advantages of English law and language plus full, unfettered access to the EU.
What that will mean in terms of employment and economic growth will not be known for some years yet. In addition, business must adjust to a very different style of government. The new prime minister has made it clear that the Blair-Cameron era, when the UK could cosy up to international business, is over.
This is going to be a more authoritarian government, imposing its wishes on companies – whether that be immigration, workers’ rights, minimum wages, payment of tax – and even, perhaps on the Bank of England’s (BoE) monetary policy.
A change in government policy is desirable in principle, but the Conservative party conference in Birmingham gave little evidence that ministers or the party faithful had much idea of what they were doing.
Most still believe in a simple world of business, where a product is made in Britain and exported to a foreign market. However, globalisation has turned that simple model into a cat’s cradle of worldwide supply chains. That domestically made product is actually a complex integration of different electronic and mechanical parts, each of which must satisfy regulations concerning rules of origin and quality standards.
