The British pound rose on the news that Liz Truss was standing down. (It’s now the best performing currency of the last month, if you can believe).
The interest rate on British government bonds fell.
The FTSE 250
index of smaller and medium-size British companies, a good bellwether for the domestic economy, rose by nearly 1%. The FTSE 100
index of large-caps, many of them multinationals, rose 0.3%.
I wrote last week that I thought that the current, absurd chaos in London was a tempting time for U.S. investors to add some U.K. stock funds to their retirement portfolio.
The downfall of Truss doesn’t make me change my mind. Quite the reverse.
If the best time to invest is when there is metaphorical “blood on the streets,” as Nathan Rothschild supposedly said, it is there right now. And if the best time to buy is at the moment of “maximum pessimism,” well, try to find a more pessimistic moment for the U.K. than the moment.
We’ve already heard, thanks to the most recent BofA Securities fund manager survey, that the people running the world’s pension funds would rather suck a lemon than own British stocks.
And FactSet reports that the U.K. stock market now trades on a mere 9 times forecast earnings, with a dividend yield of 4.5%. By any measure that is cheap.
While the news headlines are focusing on today’s farcical chaos, the markets are doing what they usually do—looking ahead.
Truss was always a ridiculous and impossible prime minister. Anyone could have gone on YouTube and seen footage of her past public appearances. These included an utter goofball speech denouncing foreign cheese, a statement in the House of Commons that barking dogs “help deter drones,” and interviews as painful and excruciating as Sarah Palin’s infamous sit-down with Katie Couric. That 81,326 grass roots members of Britain’s Conservative party voted for her anyway is an indictment of them. Truss was utterly incapable of doing this job, and was promoted vastly beyond her ability. This was cruel to her, as well as everyone else.
But now it’s over.
Whoever replaces her will be better. It might be former Chancellor of the Exchequer Rishi Sunak or the smooth, if inexperienced, cabinet minister Penny Mordaunt. Or it might be, following a general election, the worthy if dull Labour Party leader Sir Keir Starmer.
(Despite the news it is surely very unlikely to be Boris Johnson. This choice is likely to be determined by Conservative MPs, not the party base, and they have surely had enough of him.)
In other words: London has (almost certainly) passed peak political chaos. If the ruling Conservative party doesn’t stabilize the ship, the calls for an immediate general election—and a Labour government—will be irresistible.
According to the prevailing media narrative, the crisis that swept over Britain over the past month, and which brought down Truss, was supposedly because of Britain’s parlous and fragile government finances.
Getting between the media and its favorite narrative is about as unwise as getting between a Rottweiler and its favorite bone. Nonetheless, this particular story is at best simplistic and at worst downright wrong.
For example, the International Monetary Fund reports that Britain has some of the better budget numbers in the G-7 group of big, rich and free economies. Its national debt is about 75% of gross domestic product: Way lower than that of France, Italy, Japan—or the U.S. And its budget deficits are also among the lowest: Lower even than Germany’s, and half that of the U.S.
Yes, Britain depends on foreign investors to help finance its deficits. Yet the British government pays lower interest on its bonds than the U.S. does. (Only briefly, during the panic a few weeks ago, did that reverse.) If it were seen as a major financial risk, it would have to pay higher interest, not lower.
It’s hard to avoid the conclusion that the panic was more about the incompetence of Truss and her slapdash government—combined with the dangerous leverage of some British-based pension funds.
London-listed stocks make up 15% of the standard stock market index used by many “international” stock mutual funds and ETFs, the MSCI EAFE (“Europe, Australasia and Far East”) index. They make up an astonishing 21% of the stocks in the iShares MSCI EAFE Value ETF
a fund that focuses on the cheapest international stocks. Money manager Rob Arnott has called U.K. stocks “the trade of the decade.” (And they were higher then.)
Every time I visit the U.K., the general level of incompetence drives me nuts. I can see it as soon as I get off the plane at Heathrow. So I am not naturally bullish on the economy or the stock market.
On the other hand, the stocks look pretty cheap—and many of them are likely to attract foreign buyers if they stay that way. Cheap is good.
None of this suggests the London stock market is past the worst. That may not be true of London or anywhere else. The world is surely heading into a recession next year, and many Wall Street number crunchers argue that stock markets still haven’t priced that in.
But London stock prices have already priced in a lot more bad news than those elsewhere, especially in the U.S.