'The UK cannot compete anymore. There has been zero structural reform,' says Société Générale
By Ambrose Evans-Pritchard
8:29PM GMT 02 Dec 2014
Societe Generale said much of Britain's growth is driven by excess leverage and a housing bubble Photo: Alamy
France’s Société Générale has advised clients to liquidate British assets and dump sterling before the elections, warning that the UK is badly governed and increasingly prone to political risk.
“So far there has been zero structural reform and no improvement in the twin deficits or exports despite a significant devaluation of the currency. We are concerned,” it said.
Alain Bokobza, head of the French bank’s global asset team, said much of Britain’s growth is driven by excess leverage and a housing bubble. “This is due to lax monetary policy that needs tightening. It is not sustainable,” he said.
The fact that the country is still running a budget deficit of 5.5pc of GDP so late into the cycle - at a stage when growth is mature, and should be generating a cascade of tax revenues - means the economy is fundamentally out of kilter. The UK risks falling afoul of markets once sentiment changes.
The irony of a French bank blasting Britain for failing to implement supply-side reforms might cause a few smiles in Paris, where socialist president Francois Hollande is pushing through a raft of Thatcherite reforms against bitter opposition. The bank insists that France is the new reform champion in Europe, and may soon leave Germany languishing in inertia.
Société Générale said it may be a treacherous time for global markets as liquidity drains away. “While in 2014, the Fed still injected $460bn, nothing will be injected in 2015, and the Fed will almost certainly hike rates. We expect a hiccup in global equity markets.”
Mr Bokobza said it is ominous that the sterling crash in 2008-2009 has done so little to boost to exports, or drive import substitution. Five years later, Britain is running a current account deficit of 5.2pc of GDP.
This is the worst of any major country in the world, and arguably the worst in Britain's modern peacetime history, despite reassuring words from the Bank of England. “The numbers speak for themselves. The UK cannot compete anymore and this shows Britain is in need of structural reform,” he said.
Mr Bokobza said UKIP’s surge “from victory to victory” has thrown the UK into political turmoil and sharpens the market risk of EU withdrawal. He sees three likely outcomes in the general elections in May, and none of them is appetising for global investors: a Labour victory that implies a bigger state; a hung Parliament that would make it even harder to cope with Britain’s twin deficits; or a Tory victory that brings the UK closer to withdrawal from the EU. “We advise pension funds. We don’t gamble with money,” he said.
It is already clear from derivatives contracts that hedge funds have Britain in their sights. “There has been a change of ambiance. The first point of attack for speculators is in the currency market and we can see that there has been a switch to net short positions,” he said.
The bank advises clients to avoid the FTSE 250 brimming with equities linked to the domestic economy. The larger companies on the FTSE 100 are better protected since 80pc of their earnings come from overseas. Even so, the bank still expects the index to fall 3pc from now until the end of 2017.
American equities are “super expensive”. Data going back to 1871 show that US stock markets have never risen for seven years in a row.
The bank recommends a contrarian stake in European stock markets, especially bank stocks.
The French CAC 40 will rise 60pc by 2017 on the Hollande miracle, and Italy's MIB will be up 64pc. India's Sensex will be up 58pc.
Above all rotate into “super cheap” Chinese equities on the grounds that Beijing is about to capitulate again and pull the stimulus lever.
Société Générale said it may be a treacherous time for global markets as liquidity drains away. “While in 2014, the Fed still injected $460bn, nothing will be injected in 2015, and the Fed will almost certainly hike rates. We expect a hiccup in global equity markets.”
Mr Bokobza said it is ominous that the sterling crash in 2008-2009 has done so little to boost to exports, or drive import substitution. Five years later, Britain is running a current account deficit of 5.2pc of GDP.
This is the worst of any major country in the world, and arguably the worst in Britain's modern peacetime history, despite reassuring words from the Bank of England. “The numbers speak for themselves. The UK cannot compete anymore and this shows Britain is in need of structural reform,” he said.
Mr Bokobza said UKIP’s surge “from victory to victory” has thrown the UK into political turmoil and sharpens the market risk of EU withdrawal. He sees three likely outcomes in the general elections in May, and none of them is appetising for global investors: a Labour victory that implies a bigger state; a hung Parliament that would make it even harder to cope with Britain’s twin deficits; or a Tory victory that brings the UK closer to withdrawal from the EU. “We advise pension funds. We don’t gamble with money,” he said.
It is already clear from derivatives contracts that hedge funds have Britain in their sights. “There has been a change of ambiance. The first point of attack for speculators is in the currency market and we can see that there has been a switch to net short positions,” he said.
The bank advises clients to avoid the FTSE 250 brimming with equities linked to the domestic economy. The larger companies on the FTSE 100 are better protected since 80pc of their earnings come from overseas. Even so, the bank still expects the index to fall 3pc from now until the end of 2017.
American equities are “super expensive”. Data going back to 1871 show that US stock markets have never risen for seven years in a row.
The bank recommends a contrarian stake in European stock markets, especially bank stocks.
The French CAC 40 will rise 60pc by 2017 on the Hollande miracle, and Italy's MIB will be up 64pc. India's Sensex will be up 58pc.
Above all rotate into “super cheap” Chinese equities on the grounds that Beijing is about to capitulate again and pull the stimulus lever.
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