There is a real danger that the political shenanigans at Westminster and high level of uncertainty over Brexit are colouring our judgement about the outlook for the domestic economy. Being a good investor is in large part about standing back from the noise and looking at the hard facts. These are not all bad at the moment by any means.
Recent employment data is a good case in point. Comparing the three months to December with the previous quarter, the number of people in work in Britain increased, the unemployment rate remained at its lowest level since the mid-1970s and wages continued to rise faster than prices.
We may not know what’s going to happen on March 29, businesses may be less willing to invest in plant and equipment, but for now at least there is plenty of work and we’re getting paid more in inflation-adjusted terms to do it.
The unemployment rate is just 4%. It hasn’t been that low since February 1975. The number of people deemed to be ‘economically inactive’ (which includes students and stay-at-home parents, for example) is actually at its lowest level since 1971.
And while wages rising at 3.4% a year will not set the pulse racing, compared with the latest inflation data (showing prices rising at less than the Bank of England’s 2% target) that’s a decent real-terms increase.
There is a cloud surrounding this wages silver-lining and that is productivity. The latest data from the ONS showed that the output per hour worked continued to slip in the final quarter of 2018 in the UK. There are many, poorly understood, reasons for this - to do with weak business investment, a widening skills gap that is leaving vacancies at record levels, and inadequate infrastructure.
Our poor productivity is a key driver of Britain’s disappointing economic growth (although we clearly do not have a monopoly on sluggish GDP growth these days).
Clearly an assessment of the outlook for the domestic economy needs to weigh up these positives and negatives but it is important as an investor to understand both the relative importance of each of these pros and cons but also how much they really matter as drivers of our investments.
When the overall mood is uncertain, as it clearly is in the final few weeks before Britain is due to leave the EU, it is easy to attach too much significance to the bad data and ignore the good news. The news agenda plays to this psychological bias too - with, for example, 3,500 job losses in two years’ time at Honda in Swindon hitting the headlines. It’s obviously news (and very bad news for those directly impacted) but it should be compared with the 100,000 reduction in the number of unemployed in the economy as a whole over the past year.
When it comes to the importance of domestic economic data to investors, this should be carefully assessed too. UK-related news naturally has high prominence on our news programmes because it affects our daily lives. But as investors, it is of much less importance.
That’s because investors have the luxury of being able to diversify their exposure to all the world’s economies. And given the relative unimportance of the UK in the global total they absolutely should be doing this. Home bias can be an expensive mistake for investors.
And don’t forget that a UK-listed company probably has a relatively small exposure to the UK economy. The London market is more international than most of its peers. The majority of sales and profits at Britain’s biggest companies are earned overseas.
So, when thinking about whether or not to invest in the UK stock market, it is worth keeping an eye on the local news-flow and data but also to stand back from it.
A well-diversified portfolio will have a relatively small exposure to the UK stock market. And the UK stock market has a relatively small exposure to the UK economy.
So, while it’s OK to raise a small glass to the latest earnings figures from the ONS, or to worry about those facing unemployment at Honda, don’t pay too much attention to these when considering what to do with your investments. Investors are Theresa May’s famous ‘citizens of nowhere’. Enjoy this freedom.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.