Threats to the UK economy and stock market run deeper than Brexit, making most FTSE shares are unattractive regardless of the divorce outcome, Guy Miller, chief market strategist at Zurich, has said.
Mr Miller said the longer term growth potential for the UK economy had been damaged by the lack of business investment.
This investment, called fixed asset investment by economists, is lower in the UK than it is in other countries in the G7, the group of the world’s largest economies. This is partly the result of Brexit uncertainty but is also part of a longer term trend, Mr Miller said.
He explained the level of business investment had a significant impact on the level of productivity growth in an economy. And while data has shown that the UK economy has been growing at very close to its level of potential, Mr Miller said this was a result of the level of long-term underinvestment in the UK economy, meaning the level of long-term potential was actually falling.
He said Brexit had exacerbated this problem: "If I am a business owner in the UK, a company like Nissan for example, how can I commit to business investment in this climate, when I have no idea where I will be able to sell the products I make, why would I invest in the UK?"
In addition to the level of business investment, the other factor that contributes to productivity growth is an increase in the size of the working age population.
In recent years UK productivity growth has been propped up by immigrant workers adding to the working age population and increasing productivity, but if Brexit reduces the number of migrants, that engine of productivity growth would also falter.
Andy Haldane, chief economist at the Bank of England has highlighted the issue of low migration as a long term impact on the UK economy of the UK leaving the EU.
But Mr Miller added that even if the outcome of the current Brexit negotiations was market friendly, there was little scope for significant improvement in the UK economy.
He said: "The underinvestment dragging down the long-term potential means there is limited scope for the UK economy to pick up, even if there is a better Brexit outcome. As an investor, I can afford to wait for things to improve."
In 2019, he said, he expects the global economy to experience slower growth, but not a recession.
He believes US interest rates will rise at a much slower pace than the market currently expects, and this, alongside a marginally better economic outlook for China, will mean emerging markets have a stronger year in 2019.
He said many UK investors take the view that the UK economy would be boosted by a fall in the value of sterling making UK exports cheaper.
But he said: "The problem with that analysis is that in 2016, when this happened just after the referendum result was announced, the global economy was growing, so demand for exported goods was rising just at the time when the currency was falling in value."
If Mr Miller’s view of a global economic slowdown in the coming years comes to fruition, then the demand for UK exports, even at the lower price, may not be enough to make up for the shock to the UK domestic economy of the higher inflation caused by the fall in the value of sterling.
Separately, Luca Paolini, chief market strategist at Pictet, said this morning (November 17) that in developed markets companies across all industries were experiencing the "biggest number of earnings downgrades in two years".
He said: "Growth in global corporate profits is likely to halve to 7 per cent next year from this year’s 13 per cent.
"We remain underweight in the US where expect corporate profits growth to show the biggest drop among all the major regions.
"Japan continues to be our favourite region. Although the economy is suffering a slowdown in export growth, its equity market still trades at an attractive valuation."
david.thorpe@ft.com
