In a sequel ahead of its time, Dynamique’s Guy Dobson reports from London as the post-Brexit reality dawns…
Just like Alice, the UK has tumbled down the rabbit-hole, sending shockwaves around global markets with its ‘impossible’ pro-Brexit vote.
Initial reactions: true-to-form, markets over-react.
Nevertheless, sterling’s fall from an abnormal US$1.50 on the eve of the referendum down to a more realistic US$1.34 will provide competitive advantages for exporting firms. The flip-side being imports are more expensive.
However, these things take some time to work through to business input costs. The resignation of the UK Prime Minister David Cameron (with a handover in October) has headed off lame duck concerns in the short term. The task of when to trigger the two-year notice period of Article 50 will be down to a new Ministerial Brexit task force.
Brexit is proving more costly to the rest of the EU as evidenced by falls in the European stock markets which at the time of writing have declined more sharply than the FTSE 100. Markets perceive that both France and Italy have elections coming up so may well face the same dissent over the European experiment. Will this lead to an eventual break-up of the EU and the return to full sovereign EU states?
Uncharted waters swirl around us, evidenced by a tidal wave of change in people’s attitude towards the establishment, political elite and the so-called ‘bevy of experts’.
This referendum was all about who governs and the future direction of the country. The people have clearly given the EU an Agincourt drubbing and sent the Brussels Commissioners packing.
So what are the implications for the wealth management industry?
Clearly in the UK, EU financial reforms and regulations will now be put on hold much to the relief of many who were already struggling with Mifid 2, AIFMD, MIR, and a plethora of excessive client de-risking rules.
Risk management and volatility will determine which managers perform well and which fail to generate positive returns after fees for their clients in this new world order.
Opaque fund fees and true investment management costs to investors is the number one focus as the pension industry starts revolting against the hugely profitable but in some cases unjustifiable profits made by wealth management practitioners.
Unexpected movements, inability to price risk and fair value will be huge challenges as the global implications of the Brexit vote are gradually absorbed. With US10 trillion of bonds paying zero or negative interest, markets were already becoming unstable. This event has just added an accelerant to the ‘risk on’ cocktail.
For New Zealand, the fall-out from this huge event is unknown but will likely lead to separate trade deals with UK and the rest of Europe. The rush to form trade treaties such as the unpopular Trans-Pacific Partnership may well be put on hold as further scrutiny is applied to any deals which undermine sovereignty. Countries need to establish agreements which eliminate tariffs and facilitate trade, full stop. The high tide of dissatisfaction over the socio-economic divide between those who rule and those ruled-over is a salutary lesson in political terms for all governments and parties.
For Kiwi investors the question will be asked how well managers protect their clients’ capital in the wake of Brexit. If managers had no Plan B in place, class actions by disgruntled investors seeking compensation for inappropriate and unsuitable risk management may be the order of the day.
The sun has risen today as it will tomorrow.
With a weekend ahead of us to absorb the full impact of Brexit shock horror many people will no doubt return to work in a Monday in a ‘business as usual’ mode. The divided country will need time to heal but there is no doubt Brexit has highlighted the real concerns from the wider country that things had to change.
In the aftermath of the global financial crisis, where the perpetrators were not held to account, everyone’s suspicions that the establishment were re-writing the rules to protect their own at the expense of the majority were reinforced.
The quiet revolution in the ‘Shires’ has delivered a loud message to political elites: deliver or be voted out.
As with the Brexit vote, the ultimate socio-economic outcome for the UK could go either way.
However, I suspect that once the dust settles, people will look back at the momentous event of the last 24 hours and say – yes it was bold, a leap of faith down the rabbit-hole, but essential for a UK going nowhere under European control and held back by the absurd rules of an unelected body.
But for now, Alice’s route to Wonderland, seems all too real: Either the well was very deep, or she fell very slowly, for she had plenty of time as she went down to look about her and to wonder what was going to happen next…
Dynamique offers financial industry performance risk solutions and retail investor CPD programs with offices in NZ and the UK. Guy Dobson, Dynamique director, is currently in the UK