When Harry and Meghan tie the knot on Saturday in St. George’s Chapel inside Windsor Castle, it’s estimated that over three billion people will watch the ceremony on television and social media. In the weeks leading up to the big day, shops across Britain are packed with souvenirs. Tourists will be arriving to fill up the hotels, and residents across the country are planning street parties to honour the newlywed couple.
All of this means spending, and quite a lot of it too – a welcome shot in the arm for a country wading through economic uncertainty. Depending on which estimates you believe, the royal wedding is expected to give the economy a boost worth between £500 million and £1.05 billion (in Canadian dollar terms, based on recent exchange rates, that number comes in between $870 million and $1.83 billion).
I’m a firstborn Canadian to British parents and I loved the show Suits (Meghan Markle is one of the stars of that show). For both reasons, I have a keen interest in the upcoming wedding. It comes at an interesting time for Britain too. Since Brexit, the country has been struggling with low GDP growth and rising inflation numbers. $1.8 billion is a sizeable boost, even if that number materializes as predicted, we don’t believe it alone will be enough to jump start the beleaguered country.
Generally, our firm has been underweight in our exposure to Britain since Brexit came into being. This is primarily due to our underweight position in financial, energy and tobacco stocks. The MDPIM International Equity Pool is underweight by approximately 2%. Interestingly, once you remove financial, energy and tobacco stocks from the equation, we are overweight in our exposure to the country by roughly 2%. Similarly, the MD International Growth Fund is underweight the United Kingdom (U.K.) by about 1.5%. In both strategies we see an overweight in consumer discretionary, industrial and information technology names.
The consumer discretionary sector, which includes hotels, hospitality and media, is our most overweight sector position in the U.K. Related shares stand to get a definite, if momentary, boost as part of the spending that is expected to occur in the lead up to Saturday’s festivities.
Still, our view remains that there are significant risks from Brexit that continue to drive uncertainty in the economy. Companies are potentially leaving Britain, some have already done so, and there is considerable uncertainty out there when it comes to trade. There are a lot of trade deals in place today with Britain as part of the European Union. Until the details are hammered out in the years to come, it will remain unclear what trade will look like between the U.K. and the European Union, going forward.
One bright spot for the country is the price of oil. Unlike Canada where there is a fairly healthy discount on oil stocks, due to our lack of pipeline and refining capacity – issues that are not present in Britain – the U.K. is better positioned to benefit from the rising price of oil. Our view today is that we will probably continue to see strength in oil. Although we will likely see prices rise above US$80 a barrel by the end of the year, we don’t believe the long-term equilibrium crude price will remain much higher than US$70 a barrel.
But back to the royal wedding and its impact on the rest of Britain’s economy. It’ll be several months before we know for sure if the economic activity taking place ahead of the wedding will result in any meaningful blip in the country’s GDP numbers. Despite the breathless headlines, historically, royal weddings have had little impact on the economy.
When Prince William and Kate Middleton married in April 2011, the nuptials in fact held growth back to a degree when U.K. citizens were given a bank holiday to watch the ceremony and participate in public celebrations. This time around there is less risk of an economic pull back. Downing Street representatives have said repeatedly that there will not be a holiday called this time around. Because the wedding is scheduled to take place on a Saturday, fewer people are expected to be missing work to celebrate.
In short, I’ll be watching the wedding with great interest, but the U.K.’s economic issues will need more than souvenir shot glasses and tea towels to fix. At MD Financial Management we’ve planned accordingly with Brexit, we continue to watch the price of oil and the impact this wedding might have on the economy, but our view on Britain remains unchanged at this time.