Will the UK be the First Domino to Fall in a Year of Populism, Bear Markets, and Black Swans?

“For the ‘political’ times, they are a-changin”

Populism is spreading like wildfire. The political and economic landscape across the western world is shifting. The EU is beginning to fracture under the weight of discontent. Italy’s populist parties helped pivot a referendum result in December that forced Prime Minister Matteo Renzi to resign. The Netherlands and France have crucial elections this year and the front runners in those countries are tapping into the same veins of anger and resentment at the establishment. Not even Germany looks like the stable pillar it once was. Angela Merkel, who has served as Chancellor since 2005, plans to run for a fourth term in the Autumn elections. But her party, like her country, has felt the backlash against slow economic growth and mass migration across Europe. In voting to leave the European Union, the British people showed that integration of the West is neither inevitable nor irreversible. The sentiment is echoed in Trump’s economic protectionist policies, overseas commitments and his focus on putting America first.

“Too early to say”

The long-run implications of these changes won’t be known for some time. The Chinese Premier’s witticism, when asked by Richard Nixon on a visit to Beijing in 1972 about the impact of the French Revolution springs to mind – “too early to say” was Zhou Enlai’s response. Incidentally, also an example of the Woozle Effect – a diplomat present at the time called it a misunderstanding that was ‘too delicious to invite correction’. The story became legend, and a rather lazy cliché about the difference between Chinese and Western mentalities was born.

“There may be ‘economic’ trouble ahead…”

With markets continuing to record all-time highs, it’s entirely possible that this year will result in much more volatility than prior years. There is so much that is difficult to predict due to political and economic shifts, social tension, and the march of technological progress. It would not be unfeasible to conclude that 2017 may well be a year marked with black swans and bear markets – as Woozle research indicates for the UK.

The UK economy has defied expectations since the Brexit vote, at least on the surface. But what lies beneath the official projections may be cause for concern. Woozle’s team of field researchers amass interview notes that surpass 60,000 words every quarter based on thousands of conversations with key industry experts that provides our clients with real-time intelligence on the pulse of the UK economy. The diagnosis doesn’t look good. Here is what we’re seeing:

  • Consumer Spending is Falling. Figures recently released by the Office for National Statistics (ONS) reveal that spending has declined dramatically and is now at its lowest point in five years. Woozle has witnessed a definite trend in customers down trading to low-cost options and value-focused retailers. In particular, UK supermarkets are stocking more low-priced own-brand products in an effort to regain market share that is being eroded by consumers switching to the German discounters Aldi and Lidl.
  • Consumer Debt is Rising. UK consumers are increasingly reluctant to spend their cash and what spending they are doing is being fuelled by credit card and short-term unsecured debt. Bank of England figures confirm that personal debt is now just under £200 billion, which is the highest level recorded since 2008. Credit card debt is soaring around £66 billion, which again is a record high. Interest rates are at an all-time low, but if they rise as is expected, the debt bubble will be tested.
  • Under-Employment is Prevalent. Unemployment figures are also low, but what the official figures do not make clear is that many people have been forced into part-time jobs on zero-hour contracts. Woozle intelligence indicates that the implementation of the National Living Wage and worse than expected revenues on the back of a more price-conscious consumer will almost inevitably lead to reduced hours, mandatory holidays, and redundancies.
  • Inflation is Squeezing Household Budgets. The annual rate of Consumer Price Index (CPI) inflation rose to 1.8% in the year to January 2017. Higher costs for imported materials and fuels have pushed up producer prices. UK Households are feeling the pinch as prices at the pump and checkouts continue to rise in response to the weak pound. With rising prices outstripping wage increases, families are being forced into debt to pay for their everyday spending needs. Woozle research indicates that the majority of retailers are refraining from passing on increased import costs for fear of losing market share. Essentially, they are swallowing those costs which will be reflected in weaker earnings in the next cycle. Those retailers which have been brave enough to pass on costs through higher prices are currently being punished at the tills, and we confidently predict several big-name retailers will miss expectations when they next report.
  • Consumer Confidence is Falling. The confidence of British consumers continued to ebb in February, adding further doubt about overall ongoing spending capacity. Woozle suggests things are getting worse, with our research citing rising food and fuel prices, the falling pound, declining earnings, and fear of inflation as reasons to believe the worst is still to come.

“Even a broken watch is certain to be right twice a day”

There is a compelling level of confidence that comes when a team of independent researchers hear the same stories repeated over and over again from businesses all across the country. These trends become difficult to discount and the risk-return profile becomes even more attractive when it’s not yet being reported in the mainstream financial press. Woozle’s research is beginning to unveil a mosaic of material public information that predicts the likelihood of a bear market is closer than most investors think.