Brown: the market's verdict

I'll not pick apart everything Dan Hannan said in that speech. But there’s one point to question. He said:

Britain is worse off than any other country as we go into these hard times. The IMF has said so. The European Commission has said so. The markets have said so, which is why our currency has devalued by 30%.

But not all markets have said this. The stock market hasn’t. According to MSCI, the UK’s has been one of the best performing markets in the last 12 months in local currency terms. Among developed countries, only Australia, Canada and Sweden have out-performed the UK, and this only by a couple of percentage points. The UK has out-performed the world index by  almost six percentage points, and the euro zone by almost 11 percentage points.
Stock markets, then, have faith in Gordon Brown.
Well, no. There are countless reasons why the UK has out-performed. For example, it’s benefited from uncovered equity return parity (a weak currency can be good for shares sometimes) and the market has a defensive bias - lots of utilities, brewers and pharmaceuticals firms and few industrials.
Only a fool would read the stock market’s verdict as support for Brown. But why, then, regard sterling’s fall as an indictment of him, when there are other reasons (the closing of carry trades for example) for that too?
Financial markets have much better things to do than pass judgment upon politicians.
A question: why has no politician articulated what the left believes about the economy as well as Hannan has expressed the right’s views?

Comments

[Guido Fawkes]

If you ignore the 30% devaluation of the pound. Which nobody does. Very poor Dillow.

In local terms Zimbabwean stocks are up...

[chris]

But local currency returns are relevant, as the equity decision and currency choice are two separate questions for investors. The fact that the UK market has held up relatively well in local currency terms is a hint that investors are more optimistic about UK earnings than overseas ones, which might or might not be due to the benefits of a weaker currency.
Even in dollar terms, though, the UK market has out-performed the euro zone in the last year.

[dearieme]

"why has no politician articulated what the left believes about the economy as well as ....": awfully good. Your teasing gets better and better.

[JimH]

The FTSE 100 peaked in 2007 at approx 6750 and currently is just below 4000. A fall of 40%. The market may be up slightly over the last few weeks but thats hardly some massive vote of confidence in Gordon Brown. If you'd invested in 2007 you'd be well underwater by now. If you'd invested in 1997 when Labour came to power you'd just about have what you started with (plus dividends of course). That's before you factor in the fall in the pound, which would reduce the falls in foreign markets for UK investors.

[kinglear]

I think we may be entering " blow the lot" territory.

[Neville]

"why has no politician articulated what the left believes about the economy as well as ...." A good subsidiary question might be "What format would such an argument take?' How would anyone suggest a global solution (which is the only kind that gets a hearing- anything else being ruled out of court as either Nationalistic or protectionist) when at least part of the left critique, both academic and journalistic, of globalization has been, since Marx, that global solutions are the problem- to simplify massively. How in all conscience would anyone holding such views sit in a parliament either in London or in the Brussels - just a thought. You might as well ask why aren't there any anarchist candidates to vote for come the next election.

[kinglear]

I thought Gordo WAS an anarchist. He's certainly brought chaos...

[ad]

What does the Left believe about the economy?

"It's all the fault of people who do not work for the state"?

[Laban Tall]

"the equity decision and currency choice are two separate questions for investors. The fact that the UK market has held up relatively well in local currency terms is a hint that investors are more optimistic about UK earnings than overseas ones"

Why ? Me no understand (not for the first time). For an overseas investor, UK shares become cheaper - it takes less of of their currency to support a given UK price. How does that equate to greater optimism about UK earnings ? Ot is it that they're optimistic about UK earnings in UK currency terms, but pessimistic about the actual value of those earnings in their own currency - in which case they're not optimistic at all ?

[Guido Fawkes]

I once ran a stock fund in Tokyo that was up 20% in six months. Unfortunately the dollar was up more and I was unhedged. My investors were not impressed.

If the pound halved from here a lot of exporters and defensive stocks would rise. That would not be a sign of economic strength, would it?

[cjcjc]

Well of course they are more optimistic about the sterling denominated earnings of UK companies as the largest UK companies - BP, Shell, Glaxo, Vodafone, etc. - are heavily exposed to overseas earnings, which obviously rise in sterling terms as sterling falls.

Very poor article by your standards!

[Bob B]

I do wish Conservatives and their allies could make up their collective minds on whether the looming threat as the result of Gordon Brown is rampant inflation or deflation or both.

With the reported collapse of the Dumferline Building Society, it comes to be a reassuring confirmation that the Scots are intent on maintaining their legendary reputation for managing financial institutions.

Any progress yet on mooted legislation making it criminal offence to be drunk in charge of a bank?

[Bob B]

I see that Sam Brittan has been going on again in the Financial Times about:
Why UK should not fret about national debt
http://www.samuelbrittan.co.uk/text333_p.html

[chris]

Sorry chaps, I fear I didn't explain an important point.
The thing is, there are many reasons in theory why sterling might fall which would be bad for shares.
For example, if the pound falls because of lower expectations for economic growth or total factor productivity, shares would fall.
Ditto if sterling falls because of fears that high debt would raise future interest rates.
The fact that shares have held up well in local currency terms shows that these factors have not been very significant as causes of sterling's fall. Which poses the question: how can the weak pound be due to Brown's economic mismanagement, if it hasn't much affected market expectations for growth or interest rates?

[Richard]

You misread your own quote. The market is not judging politicians, it is judging our economic prospects relative to other countries, and judging them poorly. That is the result of the actions and inaction of our incompetent government. They have not go better things to do, as this is a judgement that emerges from the things they do, not a conscious decision to criticise the government.

[Bob B]

Sadly, there is little in the historic evidence to show that Conservative governments were more competent at macroeconomic management.

The Medium Term Financial Strategy of the early 1980s proved unworkable - besides inflicting social pain - and the Strategy was formally abandoned in the autumn of 1985.

Thereafter, Nigel Lawson, as Chancellor, was intent on installing the Pound in the European Exchange Rate Mechanism (ERM), which led to the unsustainable boom of the late 1980s and then renewed inflation - because interest rates can't be used at the same time both to manage the Pound exchange rate and to curb inflation. Despite all that, John Major, as Chancellor in October 1990, succeeded in fulfilling Lawson's plan of joining the ERM - with Gordon Brown cheering that on.

Famously, the Pound dropped out of the ERM in September 1992 as the result of speculative pressures and the Pound's exchange rate then dropped by about 25%. The subsequent boom in the UK economy after the 1992 recession was largely due to that boost from the lower exchange rate. By the last quarter of 1995, under Kenneth Clarke's stewardship. the UK's standardised (ILO) unemployment rate was lower than that of France, Germany or Italy and the UK's employment rate of working age people was higher. Hooray.

Curiously, in opposition after April 1997, Kenneth Clarke opposed making the Bank of England independent in managing monetary policy and wanted Britain to rejoin the ERM in order to join up with the Eurozone.

Last year, by press reports, he first advocated cutting VAT to boost the economy, a policy option later strenuously opposed by Cameron and Osborne. "Deregulation", Free Market Capitalism and lower taxes were the battle cries of the Conservatives until very recently. Maybe still.

As for the privatization of the nationalised industries by the Thatcher governments, Harold Macmillan described that course as "selling off the family silver". And Macmillan as PM had massively strengthened corporatist tendencies in Britain by creating the tripartite National Economic Development Council - along with NEDO - in 1962.

Ho hum.

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