Recently-returned to NZ after a four-month sojourn in the UK, Dynamique chief, Guy Dobson, reflects on the full Brexit experience and why investors should look through the current market concerns…
Change creates opportunities.
On this side of the rabbit-hole, though, more than the three months after the historic UK vote to leave the European Union (EU), confusion and directional doubt pervade the Brexit process.
But like Tweedledum and Tweedledee the opposing Brexit-good, Brexit-bad camps could well be squaring off for a final fight that will never take place.
Lewis Carroll’s fictional fat twins eventually abandoned their scheduled battle (over a rattle) as the reality of impending darkness, and a giant crow, closed in. And the first phase of the phoney war over the EU vote will end when, inevitably, all parties accept the reality that there is no going back.
But how do we go forward?
Of course, opportunistic consulting firms are offering their clients wonderful Brexit scenario models based on possible, unknown, might be likely, well not too sure really, but here’s a bill for our risk management services.
With a cabinet divided over the next course of action and a number of ministers under the delusional hope that the EU Commission will allow the UK to keep its trading arrangements whilst being able to tighten up its borders for selective immigration, the waters are ‘Tweedledeeised’ indeed.
Many overseas onlookers have taken a misguided view that Brexit means UK doesn’t like the French, Germans, Spanish, Italians, Dutch, Belgians and the other member states. Nothing could be further from the truth as UK still loves all the above with some caveats conditioned by history.
Enterprising UK and EU companies will continue to trade as they have done before finding ways around any bureaucratic barriers. French wine will be drunk, German cars will be driven on UK roads (UK takes 12% of the German auto-industry output, so auto executives plead ‘no tariffs!’), Italian fashions and the odd ‘Lambo’ along with Spanish tapas will be enjoyed as before.
The critical question is will it be a hard or soft Brexit? The UK is the world’s fifth-largest economy and big enough to have its own business momentum. Trading relationships with non-EU countries will continue to expand and may well take up an increasing share of UK exports.
Brexit is all about change but it is a local shock, meaning it will have more of an effect on the UK than on the rest of the world. However, there will be spill-over to EU markets with longer-term impact on global economies as the 40-year relationship begins to dissolve.
It is often said that acrimonious separations, with their clear parameters, are easier to manage than any ‘still friends’ divorce: a nice separation can lead to an extended period of obfuscation that actually increases longer-term risk.
UK’s current account deficit is close to 7% of GDP – a record high, so there are significant risks on the downside. As Governor of the Bank of England, Mark Carney, commented, the UK’s continuing funding relies on the “kindness of strangers” or those investors who buy UK Gilts.
Political contagion from Europe with upcoming elections could make Brexit negotiations even harder as governments change – so ‘who do you negotiate with?’ Countries representing 75% of EU members have upcoming elections. Will we see the continuing rise of popularism leading to other countries leaving the EU trading block?
If all these factors were to happen the negative hit by Brexit could have an increasing impact to the global economy over time.
But what do we now really know?
- The UK government has made clear it will not trigger Article 50 until 2017 leading to a full adios in 2019;
- Certain sections of the UK investment industry harbour a tenuous hope to retain access to the single market with financial services passporting rights without the free movement of labour. The EU counters this by saying the UK cannot have ‘a la carte’ – that’s not cricket, according to Jean Claude Juncker, an unelected EU Luxembourg politician who is now President of the European Commission.
What do we know about the impact of Brexit on the UK economy three months after the vote?
- Recent surveys have been on the negative side – the widely-followed Purchasing Managers Indices (PMI) has fallen to its lowest level since 2009. A key question is how reliable these surveys are as a guide to economic activity;
- The country is waiting until a clearer picture emerges from the autumn estimates in household and business spending are published;
- The Bank of England seems determined to offset the disruptive effects of Brexit vote. The base rate is currently 0.25% and is expected to be near zero by the end of the year;
- Quantitative easing will be expanded if required – although the jury is still out as regards how effective QE has been as a tool for economic stimulation;
- Markets will look to Chancellor of Exchequer for some kind of fiscal action in his autumn statement which may include tax cuts and infrastructure spending.
For investors, advisers, and wholesale market players it’s important to focus on the long-term outcomes from the split of 40-year marriage at a time of ultra-low interest rates, increasing global uncertainty, high levels of debt and the uber level of political risk.
Popularism is rapidly changing the political landscape as the current system advantages the few at the expense of the many – and, as the UK vote reinforced, the many have had enough.
Brexit, after all, means Brexit: it cannot be denied with a referendum electorate participation rate of 70% when government elections struggle to garner more than a 40% turnout.
Or, to quote Tweedledee: “Contrariwise… if it was so, it might be, and if it were so, it would be, but as it isn’t, it ain’t. That’s logic”.
Dynamique offers financial industry performance risk solutions and retail investor CPD programs with offices in NZ and the UK.