UK Equities

Is Brexit jeopardising the UK’s ‘flat white’ economy?

If you were asked to name a group who’s fuelling the UK economy, hipsters might not be on the top of your list. After all, cereal cafes and digital start-ups can lack the longevity (and credibility) of more traditional parts of the UK economy. But the ‘flat white’ economy – which includes financial technologies and the creative industries – added 14.4% in gross value to the UK economy last year, outpacing traditional industries. Coined from millennials’ tendency to meet and do business in coffee shops, the ‘flat white’ economy is now a serious driver of growth.

Part of its success is down to the influx of skilled workers to London from elsewhere in Europe. The Centre for Economics and Business Research (CEBR) estimates that EU migration has swelled employment in this sector by 40% from 2008 to 2017. Swathes of internationally-mobile young people have set up shop in the UK. But could the future of this buoyant sector be jeopardised by a messy Brexit?

Many UK businesses rely on importing human capital, and ­they strive to attract hard-working, intelligent people. For the workforce, the desire to settle is likely to include feeling welcomed and valued. Smart, ambitious young people might find Brexit Britain wanting, relative to other European capitals. A reversal of the desire or ability of talented individuals to contribute to the growth, innovation and wealth of the UK economy would be detrimental to all of us. And the emigration of internationally-mobile talent from the UK would certainly dent the prosperity of the ‘flat white’ economy.

As long-term investors, we monitor the ongoing events of Brexit, but we try to look beyond short-term market noise. With an extension to 31 October and the resignation of Theresa May, the situation is in flux, and likely to remain so in the short term. To date, the UK economy has already felt the effects of the Brexit logjam. In some areas, capital investment decisions have been deferred and economic data has experienced distortion. For example, in the run-up to the original Brexit date of 29 March, we saw evidence of companies stockpiling goods to protect against supply disruption. As companies’ inventory is included in GDP calculations, recent UK readings have been bolstered by Brexit-related inventory build-up. And while private equity investment was brisk last year in Europe, it dwindled in the UK. This underlines the obvious truth that uncertainty is off-putting.   

How do UK equities look?

While Brexit uncertainty is undoubtedly affecting companies’ decision-making, it’s not all doom and gloom. The lengthy political paralysis has contributed to the UK stock market being cheap relative to historic levels, and under-owned by global investors. The wholesale dumping of UK assets has created some attractive opportunities, which are a boon to discerning stock pickers.

And while Parliament has dithered, plenty of UK-listed companies have continued to compound their earnings, cashflows and dividends – to the benefit of equity holders. Earnings delivery remains crucial to individual stock performance, and with UK earnings expectations set at realistic levels, and monetary policy loose, this should bode well for UK stock pickers. From a currency perspective, as the risk of a hard Brexit has receded, sterling has rallied, helping contribute to some recovery in UK domestically-focused equity prices.

No one can know how Brexit will ultimately affect the UK economy, stock market and sterling. We also can’t second-guess the nature of capital flows stemming from Brexit-related volatility. However, we do know that equities are long duration assets and when held for the long term, investors can benefit from compounding returns. As ever, we’ll remain focused on well-capitalised, well-managed companies that we are confident can compound their earnings over the long term.

Coffee fads may come and go, but the investment philosophy and process we apply to each of our UK equity funds remains consistent. We’re committed to seeking out those businesses that are growing their earnings and cashflows, and where balance-sheet strength is supportive of that growth.



Britain's 'flat white economy' is now the country's biggest sector:

The Flat White Economy Has Overtaken Industry to Become the UK’s Largest Economic Sector in 2018 (CEBR):

Brexit delay is more bad news for UK business:

Private equity:


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