A slew of data points to a slow-down
Microsoft shedding 10,000 jobs; Goldman Sachs sacking 3,000 bankers and selling its corporate jets; Amazon closing several UK warehouses; US producer prices tumbling 0.5%, and those in Canada down 1.1%; US and UK December retail sales down by more than 1%; US CPI down again for the sixth straight month, now at 6.5% from a peak of 9.1% in June; German economic inflation in December nearly two points lower than October at 8.6%. The financial headline writers have been busy these past few days.

The evidence of a slowing economy is nearly all pointing one way: in the absence of any further shocks, the inflationary peak has passed. Only the UK among the major economies seems to be having trouble getting its inflation rate to drop meaningfully, thanks to 16.8% food price acceleration; it is also plagued by the more insidious and potentially enduring effect of 7.3% private sector wage escalation having a knock-on effect with prices particularly in the services sector.

China continues to be a source of debate and division: missing its 5.5% growth target by a country mile in 2022, its relaxation of Covid restrictions provokes optimism that the China ‘re-opening’ trade will be good for its national economy and by extension the global one too, tempered by the thought that too much Chinese economic exuberance will push up global energy and commodity prices, reigniting fears of inflationary pressure.

Reflecting all these potentially contradictory factors, bond yields have yo-yoed in the first three weeks of this year. However, the dominant weight of opinion among fixed income investors as they lead the witness by the nose is that the central banks’ “higher for longer” interest rate narrative is, as far as they are concerned, just plain wrong. Time will tell.

But this is all tactical, down among the weeds in the undergrowth. Of course, it is important from a short-term investment perspective, particularly in the development of monetary policy, the near-term future of interest rates, currency trends and where the best returns are likely to be made in the coming months.
Bristishvolt: a canary in the coalmine
But at the strategic level, amid all the news of a measurably slowing economic backdrop both here and abroad and the extent to which we will or will not avoid a recession, the really depressing headline this week about the state of our own national confidence had nothing to do with economics. It can be summed up in one word: Britishvolt.

The collapse into administration of the company planning a £3.6bn factory to make electric batteries, the UK’s first foray into such technology for electric vehicles and geographically placed virtually on the doorstep of Nissan, one of the biggest car makers in the UK, represents a stunning failure. It is a failure of leadership at all levels: political, commercial and financial.

Of course, there is much wringing of hands about ‘risk’ and ‘uncertainty’ and all those walking away will be able to justify why from their individual standpoints it failed to stack up. But stand back and consider the big picture against which this strategic project has collapsed: the UK still (just about) has a viable motor manufacturing industry; from 2030, by law, no new vehicles will be allowed to be sold with a combustion engine; currently and for the foreseeable future (and even if batteries are a bridge to a better and more enduring energy solution) electric vehicles are the way forward; essentially, this is a guaranteed market, the only significant unknown being the rate of take-up in the 2030s. Exactly what is missing here? Answer: leadership and gumption. In racing parlance, the British nag has fallen at the first, the vet has been called, a swift and summary bullet administered (to be fair, it’s not quite dead and buried: the site at Blyth, appropriately where the old coal-fired power station once stood, is still available but the government grant of £100m for its re-development is strictly conditional on somebody being committed to battery production on it, but it’s still a deeply inauspicious start).

It is undeniably a complex picture. For better or worse, we are progressing inexorably towards 2050 and all the world’s major countries being bound by law to meet carbon-net zero by then. Many subsets of that decarbonisation programme have already been brought forward by up to two decades by political virtue-signalling, seeking competitive advantage and national leaders wanting to be seen to be environmentally holier-than-thou (embarrassing for Olav Scholtz that right in the middle of the annual congregation of the world’s great and the good at their Alpine retreat this week, Greta Thunberg, used to being genuflected before and feted as the Darling of Davos, was detained by police in Germany while protesting over the expansion of a coal mine). In 2020, many governments with national automotive and aerospace industries to protect, used the opportunity to make the acceleration of decarbonisation programmes a condition of emergency state aid programmes enacted to mitigate against the ravages of the pandemic. Since then, expunging Trump’s position of climate change denial and America having a Damascene conversion to net-zero religion, Joe Biden’s 2022 Inflation Reduction Act has distorted the competitive picture further: full of financial green incentives covering all aspects of consumption but particularly cars and home heating, the condition is that those incentives apply only to replacement goods manufactured in the US. It is a straightforward continuation of Trump’s tariff regime in a different guise: nakedly protectionist but this time dressed up in the respectability of a bright green eco-cloak.

Under pressure, particularly from Germany which can see its lucrative US prime automotive export market by value (the UK is biggest by volume) potentially under significant threat, the EU has responded with a programme of accelerating state aid to ramp up the development of green technology. According to the European patent office, EU member states in aggregate (and of course remembering that the EU itself is not a country so to an extent the comparison is specious) have filed 27% of the global patents for hydrogen technology in the past decade, ahead of Japan (24%), the US (20%), Korea (7%), and then China, the UK, Switzerland and Canada bringing up the rear and all below 5%. It is notable the extent to which in the case of battery technology for electric vehicles and other applications, according to the European Commission website, EU member states already have “111 projects in development including 20 battery cell Gigafactories with the aim of supplying 69% and 89% of demand for batteries by 2025 and 2030 respectively with a current projected capacity to meet production of 11m electric vehicles a year”. In this market the UK has already given the impression of capitulating.
A deeper malaise
Leaving aside the whys and wherefores of this UK battery project collapsing, there is a deeper malaise behind the UK’s long-term industrial decline of which Britishvolt is merely the latest symptom. We have discussed all these before. They represent a lack of joined-up, strategic thinking, a void of vision, and no evident strength of leadership to effect real change. They need repeating because the situation is not improving. In no particular order and many are interlinked:

Political inertia: writing in the Daily Telegraph this week, Sir James Dyson (who several years ago moved all his electrical goods manufacturing offshore) rightly bemoans political inertia. He points to an increasing antipathy towards growth as a measure of economic progress (for example the Green Party, in its various guises sharing power in Scotland and Germany and in positions of significant influence in several other countries, decries GNP, balance of payments etc as measures of progress, favouring sustainability, equity and devolution instead). That ‘growth’ as a target was comprehensively dumped by Jeremy Hunt in the aftermath of the disastrous Truss/Kwarteng mini-budget debacle last year means that there is little appetite politically to prioritise it at least this side of the December 2024 election. Bond markets are complicit in this state of mind.

But political inertia is also amply demonstrated in the extent to which Brexit continues to be bogged in its own mire of tortured, time-consuming and energy-sapping negotiations, open to being hijacked by both pro- and anti-Brexit factions to their own ends. The focal points are the failure so far to make any substantive progress on either the Northern Ireland Protocol or the repeal (‘bonfire’) of EU legislation. It is seven years since the referendum, three years since Boris pronounced Brexit ‘done’. If only.

There is no obvious appetite, let alone urgency, to use Brexit as a springboard for competitive advantage and advancement, actively seeking out Boris’s ‘sunlit uplands’; yes, the technocrats are plodding through the necessary detail, but the vim and vigour, the fire and passion to grasp the opportunities offered by Brexit have all but been extinguished.

But the energy security and supply crisis is the stand-out failure. That failure is not confined to this government but its predecessors going back nearly half a century. The genesis of this article might be the inability to invest in battery production, but an even bigger blight is the refusal to create a comprehensive strategic energy and infrastructure plan that would ensure those batteries, even if made here, can actually be charged on demand, at reasonable cost and in perpetuity. Obsessed with wind and solar, we are still faffing around at the periphery, pretending that the world’s sixth largest economy’s energy needs can be met predominantly from unreliable and inconsistent sources at the mercy of daylight and the weather.

In short, there is myopic vision and zero leadership.

Toxic wealth: the antipathy towards growth is directly linked with the increasing toxicity of the concept of wealth creation, both on the left and right of the political spectrum. In the grip of Keynesian ideology both Labour and the Tories are in varying degrees proponents of redistribution. However crudely put, we are a very long way from Peter Mandelson’s New Labour declaration, “I don’t care how filthy rich people become so long as they pay their taxes”; ‘wealth’ is not quite a dirty word, but it has become very close.

Easy money, lax economy: the Bank of England’s ultra-lax policy since the Global Financial Crisis (GFC) has created an environment in which we have become conditioned to pedestrian growth being the norm (we are not unique: the US, Japan and the eurozone have all been variously afflicted by the same condition). It is popular to refer to zero interest rates as “stimulatory”; that is very clearly not the case. Stimulus is by definition a short-term or one-off event or catalyst: if it is permanent, embedded, it becomes the norm and its catalytic effect is eroded to the point of having no impact at all. Take 2010 as the starting point as the economy settled after the shock of the GFC, up to 2019 immediately before the pandemic struck: over those 10 years the mean average UK growth rate was 2.0%; but only in four years did the rate of growth increase from the previous year and for half the period it was hovering either side of a sub-par 1.5%.

As we have discussed on many occasions, the fiscal drag created by quantitative easing is evident in a significant erosion in productivity, an excess of labour and capital operating at below capacity with all its debilitating effects on competitiveness. Despite the opportunities as we enter the prime period of the great decarbonisation revolution, there appears to be a resignation that “this is as good as it gets”.

The rise of the stakeholder over the equity shareholder: a trend in development for more than a decade since the banks were rescued in the GFC and accelerated by the rescue packages enacted to mitigate against the worst ravages of the pandemic, the humble shareholder (despite providing the bedrock of permanent capital) has dropped down the list of most boards’ priorities. We live in the age of the ‘stakeholder’: employees, the community, customers, suppliers, regulators and a host of others. All have always been important to any genuinely sustainable business, but if the shareholder was the principal priority in law, that has been diminished by later statute and social pressure. There are many more distractions and calls on management time not directly involved in the production of widgets or the delivery of services. On the arc spanning capitalist and socialist principles, the pendulum has swung leftwards.

Tax disincentives: the UK is now a Big State economy and society with its highest tax burden in a century. Public services are creaking audibly but seem impervious to reform. While Rishi Sunak is allegedly ‘working day and night’ to address the problems of the NHS (and health accounts for 12% of GDP and 42% of all government spending), his efforts are largely directed at the tactical, clearing today’s patient backlog; however (how profound and with what real intent and determination remains to be seen) it is interesting that it is Labour at the moment making the running for greater reform (shadow health secretary Wes Streeting declaring the “NHS is a service not a shrine” would have been a career-ending event for him until not-so-very long ago). But high and rising personal and corporate taxes to support a bloated and inefficient public sector, plus a populist propensity to impose windfall taxes on easy targets, all add up to a significant headwind to inward investment.

As the post-pandemic labour data shows, a growing proportion of over-50s have absented themselves from the workforce. There are many contributing social and economic factors behind this phenomenon but one is the punitive taxation on pension pots; it is perverse when we are encouraged to save for our dotage that having reached a politically arbitrary financial limit (and when we get there is today dominated by discount rates tied to gilt yields, both of which are beyond the control of the individual), the marginal tax liability is so punitive it acts as a real disincentive to continue working, even if you are able to and want to, for fear of exceeding the limit and being left significantly the poorer for it.

We could go on. But taking the optimistic viewpoint, the trend is not irreversible. A similar fatalistic mindset was abroad in the 1970s. Margaret Thatcher, Keith Joseph, Alan Walters, Ronald Reagan and others demonstrated that it could be arrested by intellectual rigour, principled ideology and bold, strategic and visionary leadership to see it through.
Finding the golden nuggets
But against the current gloomy prognosis, you would be entitled to ask why we bother to invest in UK companies at all! The answer is simple: there are many excellent, indeed some world-leading businesses here which thrive despite these headwinds, and many whose revenues and profits do not rely purely on the fortunes of the UK economy (it is estimated that in the FTSE 100, more than 70% of revenues are international rather than domestic). On the Jupiter Merlin team we spend considerable time and effort seeking outstanding active fund managers who can find success stories in which to invest and help to develop those companies’ potential further. It keeps us moving forward!

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

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