Asset Management: Asset Manager Insights

Parting is such sweet sorrow…

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How wrong the experts and the opinion-pollsters were. Complacency ruled, even until the evening of the vote, and then the surprise results started to drift in. Almost all the bets were one way — fortunes were made and fortunes were lost but probably more in the latter category. Of course, traders don’t care about the result, they just want volatility. Fundamentals and a long-term outlook — bah! Investors on the other hand…

So what do we think? At the risk of being chased out of town, our judgement is that the scare tactics used by the politicians and others in the ‘Remain’ camp were wildly overblown. What did they think the ‘Brexiters’ were going to do — attach a large outboard motor to Britain and send it off to the middle of the Atlantic? It is worth bearing in mind that Britain does an immense amount of trade with the other 27 member countries of the EU and the trade balance is very firmly in favour of the 27 (£58.8 billion trade surplus in 2014 and £67.8 billion in 2015). In fact, just over half of Britain’s imports of goods and services are sourced within the EU (53% in both 2014 and 2015).

Did anyone seriously think that the British would stop buying French wine or German cars and machinery — or that those exporters would want to stop selling to the UK? The UK trade deficit with Germany is huge — £25.4 billion in 2015. That single country accounts for around a quarter of all Britain’s imports from the EU whilst imports from France account for around 13%. Britain is therefore a very important customer for these two countries and for the rest of the EU. Much public gnashing of teeth will occur but in the end pragmatism will rule.

Do you hear that pounding noise? That’s the scurrying feet of hundreds of negotiators rushing to Britain to ensure their trade linkages are reaffirmed.

Those concerned about Britain’s export prospects would do well to reflect on the steep depreciation of sterling that has now occurred. Many countries around the world will be envious of this three-card trick — achieving a massive competitive devaluation whilst making it appear that it is the last thing intended.

It is a pity that immigration issues were front and centre of much of the campaign. It is a topic that produces considerable emotion and generally results in the consignment of fundamental economics to the dustbin. The fact is that the UK, in common with virtually all western countries, requires strong immigration to ensure its workforce keeps growing — a foundation of solid economic growth. It is many years since the birthrate was high enough to ensure population replacement.

The ‘Remain’ camp injected unnecessary fear into the hearts of many immigrants — they are not about to be expelled and it was depressing witnessing this concern being expressed. The ‘Leave’ advocates have spoken about regaining a measure of control of future immigration, perhaps introducing a points-based system similar to the one operating successfully in Australia — another country dependent on strong migrant flows. This is nothing but sensible policy. No government of the UK would be so foolish as to try and dry up the immigrant intake.

Most British residents will be suffering from Brexit exhaustion. It has dominated the news for months. Now that the vote has been cast, the media is full of prognostications of all varieties — from the dire (recession, depression, apocalypse) to the benign (nothing much will change, and in fact, net net, the country will be better off in the long-term). How is the average citizen supposed to have any idea of where we are heading?

One outcome that is likely is that the forces for split-up of the eurozone and possibly the EU will gather strength. Our long-term readers will be aware that we have always been ardent advocates of the break-up of the eurozone. It is a dysfunctional assemblage that makes no economic sense as currently constituted. A return to sovereign currencies is something that we would cheer. As for the EU…its early forerunner, the Council of Europe, way back in 1949, was a logical grouping of ten countries with admirable goals (freedom, peace and democracy). Its current incarnation however is a lumbering and expensive bureaucratic monster with federalist goals.

Its involvement in sovereign affairs is well beyond the intentions of the post-war founding nations. It is now a victim of its own bureaucracy. A sentiment often expressed by the ‘Brexiters’ was…“we are sick of being bossed around.” Federalism, the goal of the current ruling elite in the EU machine is not something that sits comfortably in the UK or many other European countries.

It is all going to be difficult to unravel because there is no precedent to follow and there are not insignificant constitutional and legal hurdles to overcome. The actions the UK now takes may end up being a template for others to follow.

The UK joined what was then known as the European Economic Community in January 1972 when Edward Heath signed the Treaty of Accession in Brussels. Membership of the common market took effect in 1973. The EEC morphed into the EU following the Maastricht Treaty in 1993. So there are over 40 years of ‘unpicking’ required. In technical terms, the UK is now required to invoke Article 50 of the Lisbon Treaty — although the precise timing of this step is entirely in the hands of the British government. Once invoked there is approximately a two-year period allowed to organise the ‘exit.’ We won’t be short of material for our BMO Global Investment Insights!

 

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