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16 Eastcheap, 5th and 6th floor
United Kingdom

+44 (0) 20 3880 0575

Office Hours
Monday - Friday
8:00am - 5:30pm

In this week’s edition of Privalgo’s Q&A I am joined by Ryan, Matt, Spencer and Zeb. with a fantastic grasp of markets and politics, their views and opinions create conversation and thought. Privalgo encourages free thinking and welcomes debate. In this edition we discuss the UK’s spiraling Government debt and the impact of China’s growth on the environment.

UK Government Debt 

Ryan – With the spending review on Wednesday I think it is a really emotive topic in the UK. Rishi Sunak has been perceived as doing a good job as he is handing out cash, which makes him look good. When he provides the review and the current predicted level of debt in the UK, it will be good to see how he stands up against the scrutiny of the political journalists and columnists, which will be his biggest test.

With regards to the reported public spending cuts, Ryan, I know you have a personal interest in this with your partner being a teacher. How do you think this is going to be received?  

Ryan – It won’t be well received, the teaching community has only ever received inflationary rises at best, so having no increase will have a big impact.

Matt – We can’t be seen to be celebrating front line workers and then cut pay, so it is a political move. There is going to have to be cutbacks to cover the unprecedented debt. This is the worse debt the UK has seen since the 60’s and unfortunately the public sector is an easy way to claw back some of these funds. This is a shame as we have just come out of 10 years of austerity.

It has been reported that a 3 year pay freeze could save 7.7 billion a year.  

Zeb – In isolation it sounds like a decent saving but looking at some of the other areas of investment that have been reported, such as defense spending at £16 billion a year, it loses its impact slightly.

Ryan – The defense is interesting as this is the most money allocated to defense since the Cold War, and it makes you wonder what prompted this.

Zeb – NATO during this time has lost prominence due to Trump, so it is not the deterrent it once was. I think most of that budget will be allocated to bolster cyber capabilities.

Do we think the extra money for defense may well be allocated to give the capability to increase employment levels, especially in giving opportunity to the young? 

Matt – It is long overdue that there has been a commitment to spend. It is a lot of money but with the new threats we are seeing with cyber warfare the UK needs to catch up with the developments of other countries like Russia and China, as we are significantly behind. This will also produce 1000s of jobs, especially in Scotland, which is also a major benefit.

Scotland may be an interesting point, if we increase spending in defense projects such as Trident, this would increase local employment, maybe it would go some way to stop the desire for a second referendum. 

Matt – The anti-union feeling probably goes deeper than saving jobs.

Is the timing a little insensitive. Freezing public sector pay and then spending huge amounts in defense? 

Matt –The western world seems to be under constant attack from China either via cyber-attacks or by economic power. I think we may see a coalition forming between UK, EU, US and Australia to try and stem some of the aggression from China.

Zeb – Cyber defense is so important; this is where modern warfare is headed.

Ryan – Biological as well.

Zeb – Satellite assets in space is leading spending to a ‘Star Wars’ style of spending.

Ryan – The U.S. is paranoid about the Chinese, for example, the Huawei stoppage, when it was believed China was installing tracking devices in their equipment. That being said, this is not that much different from the social media giants.

I wonder what Biden’s view of that will be.  

Ryan – To answer your previous question on the capping of public sector worker spending. There isn’t a particular tax hike or pay cut that will be a quick fix for the deficit that is spiraling. The forecast for borrowing is estimated at £400 billion. Next year, due to the inevitable unemployment, cutting spending won’t be a quick fix, and total UK borrowing will up to an estimated of £2000 billion. 105% of GDP. Realistically the only way the government will pay back the debt will be through economic growth.

Matt – I totally agree. Growth is the only way to bring down the deficit.

Ryan – The government have to be banking on the resolve of the British public to drive this growth.

Spencer – I agree and if we do leave the EU, we need to entice foreign businesses to the UK and that’s why our approach to Capital Gains tax confuses me. It will be hard to get foreign investment if the Capital gains tax is higher, surely it needs to be lowered at some stage to beat competition and entice businesses to the UK.

Matt – There has to be an element of changing fiscal policy to adapt to increased borrowing and inevitably there will be some increases and a freeze in public spending is part of this. But more importantly we need to get the trade deal negotiated so we can get on with putting Britain at the front of the global stage for innovation and technical excellence. We need to attract investment, and this is not the time to increase Capital Gains tax. It needs to be reduced, to drive investment and push the growth. We do need to look at different forms of tax. I would suggest a COVID tax that takes a very small percentage that would generate billions. With the wartime spirit and camaraderie we have at the moment it might make this tax rise just about acceptable.

Zeb – Unfortunately, I think that spirit is dwindling now.

Zeb – As an alternative, Germany is considering a “working from home” tax (WFH) post Covid. Looking at the average person who is WFH, on average, most are saving money in the form of reduced transport costs, etc. People who chose to work from home would be no worse off than those in the office, as a result the government increases tax revenue. Would this drive people back to the office though?

If we stop spending in the public sector, over the longer term are we not going to affect growth and innovation? Surely the next generation will suffer. There will be very little incentive for people to train to be teachers for example.  

Spencer – It’s important to note that we are not stopping spending, we are just not increasing. We will have to pay more tax and that is just the way it is.

Zeb – If you look at post WW2 the way the UK drove productivity was mass migration to the UK. The old parts of the empire and those communities came to the UK to work in factories. Now you can focus on the making workforce more intelligent through education, but this is a longer-term plan. The second part is that the UK needs to relax the GDPR rules as the big tech companies will look at this and if moving head offices to UK means they are less effected due to regulation; Big tech will look for alternatives.

Spencer – That is the flaw at the moment, the competition rules and they can’t agree on it, and to have this we need a no deal Brexit.

Zeb – This is already happening in Europe and it is not a secret why some of these company’s Head Offices are in Ireland and not in other Euro countries. There is still tax competition in Euro states for these companies and the UK could do the same in many areas and position itself to capitalize on the new landscape. Migration from skilled workers would be welcomed and add to UK society and growth.

Matt – That’s a really fair point.

Where do we see markets going? The FTSE is around 6300 at the moment, the high is around 7900 in 2018. Will we see a steady decline in markets as news is released on unemployment and growth, or do we think they will bounce back? 

Matt – The vaccine news has been interesting in relation to the market. The latest vaccine announcement from Astra Zeneca’s hasn’t produced the same reaction and market move on the FTSE. But we now have three potential vaccines on the market which will be available in the coming months. This can be only seen as a positive.

If there is a lockdown in January that will have further impact on the travel and hospitality sectors. The short-term overall growth picture is pretty bleak and we are witnessing the sharpest drop in GDP since 1700’s. I think we will see a V-shape recovery though towards the end of Spring or earlier depending on the further developments in vaccines. The fact that three vaccines have been developed within nine months is unheard of and unprecedented. This showcases human ingenuity and innovation at its best and fortunately will help speed up the recovery.

Do we know the actual cost of the vaccine, per user?  

Ryan – Astra’s is significantly cheaper and costs the same as a cup of coffee I believe.

Matt – Thinking further about the recovery, the other thing to consider is the unemployment picture. In the 1980s it was 12% and the current forecast predicts a peak of around 7%. This has been partly driven by furlough and I think this will assist the recovery. The demand is there and ready to go when we can get life back to some normality. If we can keep the progression with vaccines, we will see a sharp uptick in growth in January.

Ryan – The vaccine is so important, it allows us to go out and spend this pent-up demand, if we don’t progress the ‘good feeling’ from the vaccine it will dissipate. We need to strike whilst the iron is hot. Contraction in the UK economy is the biggest we have had in over 300 years; BoE have forecast it to be 11% down.

Spencer – Ryan said the other day, when furlough ends, we will have a better picture on growth. Some companies wouldn’t have survived the last 9 months regardless of Covid. Once the furlough scheme finishes these will become obvious. The unemployment is key too, what were the numbers after the credit crunch?

Matt – It was above 8%

Spencer – Comparing now to the recession in the 90s, people genuinely didn’t have any money, I am sure there are some that don’t have money in this climate, but there are still people investing and whilst the interest rate is low, investors can still get a yield.

Matt – The cost of borrowing is so low to the government, the next concern will be inflation, if you see growth and spending start to spiral this could be the next issue for the BoE to face. It is due to go above 3% and it may start to overheat the economy.

Zeb – A few stats: FTSE 100 = 18.6% away from the high pre-Covid. The FTSE 250 is only 12% away from pre-Covid high. That indicates the FTSE 100 is not reflective of the UK economy, but the FTSE 250 is a better reflection. I think the markets will rally and there will be a marked difference between the FTSE 100 and 250. The UK is lagging behind other stock markets – All three of the major U.S. Markets are all above the pre-Covid levels. That is representative of the US economy whilst they still have a high level of Covid infections. The same can be observed with Euro stocks. Brexit could be a reason for the lag in the UK

Ryan – Brexit brings uncertainty and money is not going to be invested somewhere that has extra uncertainty on top of Covid.

Zeb – Professional Investors see the underperformance in UK stocks, and they see opportunity. Personally, I think the UK equity markets and the Pound are both undervalued.

Ryan – Yes agreed, they both look god from an investment perspective.

Zeb – Looking at overseas investors, you have the double impact of low stock prices and the sterling effect. Combine the two, the discounted value of UK equities plus the buying power of the euro against the pound creates a very strong buy signal.

With the government’s handling on the crisis where do you think the general election will go?  

Spencer – Depends who is in charge of the Conservative party when we get there.

Do you think Boris’s days are numbered? 

Spencer – I think he will leave in January and Rishi will take over. Historically when there has been an interim change in government, it hasn’t helped the party get re-elected.

Zeb – Keir Starmer is starting to gain traction, which I believe is linked to the spending review. I think Labour is moving to center left, with Corbyn they went far left and the conservatives are moving center right, so they will have to move with Biden and there will be a fight in the middle. Starmer is certainly more palatable as a leader than Corbyn.

Matt – I think it’s too early to say. The election is three years away, Boris has been given an impossible task. If you look pre-Covid, in January there was so much more positivity, and consumer sentiment was coming back after 2019 which was dominated by Brexit, and the political divisions in the Tory party. Boris has made a commitment to his new voters and he has to deliver and invest in the Northern counties especially which haven’t voted Conservative for years, if ever! If he manages this relationship, I think he will be re-elected. I don’t think that Rishi is ready, nor do I think he would want the post at the moment, why would anyone want to take the role now? We have a long way to go, I think he will bide his time.

Ryan – He hasn’t received any scrutiny; he is handing out cash and everyone loves him for it.

Matt –The investment in the defense sector will keep Tory backbenchers who are in support of this happy, so he is fairly well supported in the Tory party. How he will be judged is by how well the UK economy rebounds.

Ryan – In the last election, the Tory majority came from the north, driven by the support of Dominic Cummins. I think it will be interesting so see how the election pans out, especially now the Labour party has a strong leader.

Spencer – I am not convinced on Starmer, he is focusing on what he would have done, not what he is going to do. Hindsight is a wonderful thing, but I don’t want to know what you would have done three months ago, I want to know what you will do in the next three months, then you can stand up and be counted like a PM would.

Matt – It is easier to criticize at the moment, and it’s an impossible position.

Spencer – Which is why I think Boris will leave in January, why subject yourself to further pressure. He is damned if he does and damned if he doesn’t, there isn’t a single government on the planet that has got this right.

China and the Environment. 

Ryan – I think China is an interesting point. They seem to be the country that is leading the world on the recovery and has been led by the state industrial sectors (steel, cement, aluminium), these are all up in October year on year. These are fuelled by fossil fuels and there will be some backlash on China in regard to emissions as this isn’t sustainable for the planet or as a long-term strategy.

Spencer – I am not sure they are that bothered about the global impact. GDP in China needs to be at 10% to be flat. They are cash rich and own most of the US debt, making it difficult to challenge them but they should be challenged on this environmental impact.

China has said they will net zero carbon by 2060.  

Spencer – Is that realistically possible?

Output/production is up 10% on last year but so much of this is internal use and demand. Exports have dropped over the last 5 months, but the growth is there due to the internal demand These are fossil fuel energy industries and they will not become environmentally friendly overnight. Should there be tougher sanctions? 

Zeb – The Chinese sphere of influence is increasing globally, and I think Trump did more than any other government to try and curb this. China has turned into a powerhouse, so doing anything now is hard, but we should be working with the Chinese to get better outcomes for everyone. In a weird way the UK need China. China’s demand for UK goods will be welcomed after Brexit.

Matt – The UK brand is big in China; it does feel like we are tripping up with regards to keeping Chinese relations amicable. Stopping investment in nuclear power stations and limiting China’s overall investment in the UK, that’s pushing China away not building relations.

Zeb – I see a global anti-China movement, but I don’t think it will work out how they want it to.

Matt – China have invested in Africa and the economic impact is now coming to light with countries having debt they can’t afford. There has been bad press on how they have conducted themselves and there will be a back lash. Australia have already taken this stance. Coming back to my earlier point, if we have strong relationships with the US and Australia and form a type of coalition, China may have less influence.

Ryan – Biden wont challenge China and if the US doesn’t, then who else will?

It is always enlightening to be around individuals that are honest and open with their opinions. Privalgo promote this philosophy of free thinking and development. Continual training, support and conversation seems to be a mantra that senior members of staff encourage and reward. I look forward to many more meetings with these extremely well informed individuals. 

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Matthew Clarke | Director & Founder

A classically trained Historian with a diploma in Technical Analysis, Matt has been in the FX industry for over 13 years and takes a keen interest in the Markets. Committed to growing his knowledge of the industry, Matt is a member of the Society of Technical Analysis.

Zeb Bham | Director & Founder

A frequent foreign exchange market commentator, Zeb has over 13 years working in financial services and FX. With an BA (Honours) in Economics from UCL London, Zeb has expanded his knowledge to poses a deep understanding across a wide variety of financial sectors and industries.

Spencer Nixon | Senior Relationship Manager

Since the beginning of the century, Spencer has been delivering exceptional service in the Foreign exchange space, working at every level in the industry managing around £1.5billion in FX per annum. Spencer is a CF30 qualified financial services professional with experience that spans from private clients to running an institutional desks Spencer’s knowledge is limitless.

Ryan Hallahan | Senior Relationship Manager

Ryan is a CF30 level qualified financial services professional and has been working in the deliverable foreign exchange and business development space for almost a decade, his personable nature and his exceptional knowledge and professionalism has given him the ability to gain extensive experience and build relationships with SME’s and large corporations helping them effectively manage their foreign exchange and international payment requirements.

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