True Capital's Response to the EU Referendum Result: An Opportunity

Friday 24 June, 2016

Overall, and as reflected by public markets’ initial reaction to the realisation of Brexit, the UK’s decision to leave the EU brings a range of risks, in some cases material, to businesses exposed to UK consumers. We set out below a range of factors which we consider to be most relevant and which, we believe, should be at the forefront of business leaders’ minds in creating and delivering strategies to confront our changed circumstances.

Consumer confidence

Even during the pre-referendum debate there was near uniform consensus that an ‘Out’ decision would have negative consequences for the economy in the immediate term. To some extent this will become a self-fulfilling prophesy – confidence has faltered (albeit from elevated levels) in recent months as uncertainty over Britain’s political and economic future has mounted. It seems highly likely that confidence measures will deteriorate further in the period ahead, consistent with a process of demand contraction.

It is also the case that the UK consumer savings ratio is close to historic lows. This is significant and worrying because it means that there is little ‘slack’ in consumer spending patterns. If, as seems likely, the supply of credit to consumers which, until recently, has been growing robustly, is also curtailed then the impact on spending in discretionary categories could be substantial.

House prices

There is a reasonable likelihood that UK house prices will experience a downwards correction, in part as overseas demand slackens (a London-centric feature), but also as a function of more subdued overall economic activity and confidence. From a structural standpoint this can be conceived as a positive development; price has been, alongside mortgage availability, a significant hindrance to first time buyers, accordingly in the long term (and assuming mortgage supply recovers) this has the scope to provide a welcome rebalance to the housing market in the UK.

However, given that a very significant proportion of UK household wealth is held in domestic property assets (and house price movements are a critical contributor to many consumers’ innate sense of their financial wellbeing) any substantial downwards move in pricing is likely to contribute to recessionary trends in consumption patterns.


The UK economic recovery from the recession in 2008/09 has been glacial (with an unusually slow recovery in output relative to previous downturns) however, from a consumer perspective, it has received a shot in the arm over the past two years from a period of low inflation/deflation in key areas of non-discretionary spending (food, utilities and fuel). This is at risk now from two sources; first depreciation in Sterling will naturally act to import inflation into the economy, and second there is a reasonable likelihood that an “emergency budget” will be required to shore up public finances and that this will incorporate a higher fiscal burden on consumers. As evidenced in the aftermath of the financial crisis-induced recession the capacity of consumers to absorb higher taxes (for example a higher rate of VAT) is likely to prove subservient to the requirement to address the Budget deficit.

Labour market

The bedrock of the recovery in economic activity in the UK since 2010 has been the labour market. Although productivity measures have remained troublingly stagnant, the fact is that more hours are being worked in the UK economy than at any time in the past. Unemployment has fallen consistently and substantially in the last few years. This positive force is likely to reverse in the period immediately ahead. The loss of livelihood and economic independence which comes with rising unemployment is a substantial drain not only on the specific victims but also has a depressing effect across the broader national workforce as job security erodes. The relative bargaining position of workers also diminishes (and the capacity of employers to raise wages is also reduced), meaning that nominal wage growth is liable to stagnate. This will be compounded if, as expected, inflation accelerates.

Pace of decline & recovery

UK recessions, while painful, have historically been characterised by ‘short, sharp shocks’ – a rapid, relatively short-lived reduction in output followed by a robust recovery in which previous peak levels are soon surpassed. The 2008/09 recession demonstrates that this is not necessarily the case. In the current situation it is perilous to make assertive predictions but the scope for a prolonged period of political and economic uncertainty as the UK makes its inelegant exit from the EU precipitating, potentially, further crises (ultimately existential in nature) for the European project has the potential to deliver a protracted and debilitating period of domestic economic weakness. It could be a long war.


Financial markets have delivered an instant verdict on Sterling, marking it down materially against the currencies of all our major trading partners. As an importing nation this has natural consequences for inflation. At the corporate/enterprise level specific challenges arise regarding the scope to pass input price deflation through to consumers who are, as discussed, likely to be under heightened economic pressure. On the positive side, of course, this development does drive a competitive advantage for UK businesses which export and the advent of the internet/online retailing has dramatically increased the scope for cross border trade.

Public finances, fiscal & monetary policy

As already discussed it is clear that public finances, like consumers’, are ill-prepared for another economic downturn. The Budget Deficit remains and tackling this has formed a critical plank of government economic policy since 2010. Lower tax receipts (income tax, National Insurance, VAT, stamp duty, corporation tax etc) appear inevitable while an increase in unemployment also naturally places a pressure on government expenditure in the form of higher benefit payments. We consider an ‘emergency budget’ to be inevitable and while, politically, this will be extremely difficult to deliver the reality is that higher tax rates are likely to prove necessary in the period ahead. This, in turn, will further depress consumer behaviour.

The Bank of England is charged with ensuring financial stability in the UK and it seems likely that it will act in response to economic turmoil resulting from ‘Brexit’. The problem, of course, is that ammunition (at least as regards “conventional” monetary policy) is low with Bank Rate already set at just ½%. Further rounds of quantitative easing (QE) seem likely and have shown some capacity to bolster asset prices although, as money-printing-by-another-name, QE brings additional inflationary risks.

Political uncertainty / vacuum

The unexpected nature of the referendum result and subsequent resignation of the Prime Minister creates an unhelpfully uncertain political backdrop to economic events. The combination of a (potentially tawdry) leadership battle in the Conservative Party, a narrow Commons majority (inhibiting the ability of the government to enact policy) and a scarcely credible Opposition leadership is highly unlikely to bolster consumers’ confidence in their economic prospects over the period ahead. Further to this it seems likely that there will be renewed calls for a referendum in Scotland on membership of the Union – these will prove hard to resist, engender further uncertainty and offer a reasonable probability of a breakup of the UK, further weakening its collective economic appeal and influence.

Lessons from the past and mitigating factors

The outlook, clearly, is not good and to pretend otherwise would be disingenuous at best and dangerously irresponsible at worst. Counteracting the trends and factors outlined above is not straightforward although the relatively recent experience of the 2008/09 recession does provide some indicators of the likely instinctive reactions of consumers to an economic ‘shock’.

Firstly it should be clear that demonstrable differentiation from your competitors is critical. Being a bit better, cheaper, or quicker is unlikely, absent rampant underlying market momentum, to prove sufficient in more straightened times. Focus on and accentuate the elements of your offer which are genuinely distinctive.

Secondly, take advantage of technology. Innovation drives productivity improvements which, in turn, enable cost bases to be optimised and/or customer value propositions to be enhanced. Re-examine where you spend money, particularly in areas such as marketing where new communication channels offer scope to disintermediate established media without compromising engagement and impact.

Thirdly, if possible, take advantage of your increased competitiveness in international markets.

Fourthly, stay prudent. This applies most particularly to financing where balance sheet strength can become invaluable, particularly if your competitors are heavily leveraged. It also means that planning and budgeting should be undertaken on the basis that conditions will toughen and not recover quickly; it is much easier and infinitely more comfortable to respond to unexpected improvements in demand than to accommodate a shortfall vs budget.

Finally, remain alert. Economic shocks provide opportunities. Some competitors will fail to adapt, others will be too uncompetitive for a tougher environment, some will have unstable financing structures and plenty will make poor choices with regards to defending their position by losing sight of the demands of their customers. In the long run your markets may become less crowded and, accordingly, more attractive. Some good businesses will find themselves in distress, offering strategic M&A opportunities at attractive prices. Better talent will be available at a lower price than was previously the case. Be alive to the opportunities as well as the risks.

True Capital has been set up to invest in disruptive businesses, businesses with technology and data at their core and businesses that fundamentally improve the value proposition for customers. This means better product, cheaper, more efficiently delivered, with exceptional service executed through a more scalable platform. 

We believe it is these differentiators that will enable companies to win in periods of economic stress.