Client update on Brexit
We provide our updated research and analysis for clients post the UK Brexit vote.
You will no doubt have noticed the significant political gyrations in recent weeks in both the UK and Australia and wondered what this may mean for your portfolio. If you’ve been completely switched off and missed the headlines, we hope this article is still interesting for you.
We are currently finalising our latest Investing Insights Report for our clients. Published twice a year, this report summarises our key investing themes for the next 6 to 12 months.
This article will be included and updated in our 2016 H2 Investing Insights report. We have published this earlier than the report as we aim to communicate with our clients in a timely manner.
A few weeks ago we shared with clients our thoughts and recommendations on the then possibility (and now actual) exit of the United Kingdom from the European Union. Today we share our thoughts on the (non?) results of the Australian Federal election and re-iterate our Brexit thoughts.
Update on Brexit
At this stage we do not recommend that investors re-invest back into Europe. We believe the coming months will be volatile for both the UK and Europe as they start to negotiate the devilishly complex issues of extricating the UK from the EU.
We cannot see any material catalysts in the coming months for either a material fall or surge in European markets until the negotiations are well underway and markets get a sense of where they are heading.
Once a new Tory leader (who will become Prime Minister) is elected, the UK’s negotiations with the EU will begin. Even before Boris Johnson (who was favoured to lead), we predicted that a more moderate and compromise candidate in the form of Teresa May could win. We continue to hold that view.
We took no view on whether Brexit was the right or wrong thing to do for the UK people, but we did have a view on the potential economic impact of Brexit. In our view, Brexit was a significant economic risk with large potential downside and with little upside.
We openly admit that we did not think that the Brexit leave vote would actually pass. We simply did not think that a Leave result was in the UK’s best financial interests. We continue to hold this view.
Having said that, we did advise clients in our ‘Changing Gears in Europe’ report that the risk of a Leave vote had increased significantly in the last few weeks of the referendum campaign and that clients should immediately divest their diversified European holdings.
We predicted three things would result if the Leave camp was successful:
- Brexit will lead to political and economic uncertainty in the UK
- Breaking up will be hard to do
- Brexit will be just the start and not a resolution for Europe
We re-iterate what we said on economic uncertainty:
“A successful Brexit vote will not resolve the economic uncertainty. Ongoing uncertainty will linger for an extended period as the terms of the departure are hammered out between the UK and Europe.”
“It’s hard to see how a smaller UK trying to negotiate with larger trading blocs can be an economic advantage. It’s even harder to see how a jilted Europe would be in any mood to offer the UK generous trade concessions.”
We re-iterate our views on political uncertainty:
“With this political background, we believe a successful Brexit vote will leave Prime Minister Cameron’s authority both in the UK and within his own party fatally wounded. We can easily see an Australian style situation arise wherein even if Cameron doesn’t resign, the ongoing political instability will inevitably result in the replacement of an incumbent Prime Minister by their own party.
“So potentially the UK will have political upheaval at the top level of government exactly at the same time it needs political stability to make crucial economic decisions to help resolve the economic uncertainty. We can’t see this potential double whammy ending well.”
We re-iterate our views on the breakup with the EU:
“What is certain is that after 40 years of effective marriage, the separation will be tricky and likely messy. Like any marriage there will be acrimony and threats of recriminations. There may even be questions over the future of the ‘children’ (read Scotland which favours remaining in Europe and could look to leave the UK).”
“If the UK votes to leave, they will immediately lose their power in the EU. It won’t be Downing Street setting the terms of the divorce, it will be the remaining 27 EU leaders in Brussels who will each have national vetoes. The UK can choose to leave but they can’t dictate the terms under which they will leave.”
“It could be entirely rational for the EU to set down a marker for other countries who may seek to leave the EU in the future by punishing the UK. By making the UK’s departure as economically and politically painful as possible this may prove a credible threat to others considering the same. This approach, while rational, would certainly not benefit the UK.”
We re-iterate our view that this would be the start and not a resolution for Europe:
“Should the UK vote to leave, it will resolve nothing for Europe. Like Greece, the question will simply shift to who is next to leave? While we can’t see the next country being one of the 3 remaining major economies (Germany, France or Italy), nationalistic pressures in countries like Sweden, Belgium or Austria could lead to similar Brexit discussions.”
“So we believe Brexit could place incredible pressures on the entire post World War 2 European project that could undermine its success. Brexit will be just the start of its problems and not a resolution.”