“Brexit means Brexit.” But what does that really mean?

1Introduction

As everyone now knows, David Cameron’s promised referendum on the UK’s continued membership of the European Union was held on Thursday 23rd June. It resulted in a win for the ‘Leave’ campaign, with 51.89% of the votes cast. More than 17m people voted to leave the EU, with just over 16m supporting ‘Remain’.

David Cameron duly fell on his sword and Boris Johnson’s move into 10 Downing Street appeared inevitable. But never was “a week is a long time in politics” more true. One by one the leadership contenders dropped out of the race and Theresa May became the UK’s second woman Prime Minister on 11th July.

May had supported ‘Remain’ in the referendum campaign – albeit in a lukewarm way - apparently to the fury of David Cameron. Her first significant statement as PM was simple: “Brexit means Brexit.” There would be no second referendum: Theresa May saw it as her job to deliver the will of the British people and take the UK out of the European Union.

Article 50

The formal process for leaving the EU involves ‘triggering Article 50’: a country giving formal notice of its intention to leave. Speaking at the Conservative Party Conference on October 2nd, Theresa May said that she would do this, “by the end of March 2017.”

This will then begin a two year consultation process (which under current rules can only be extended with the consent of all the other EU member states). Under the current timetable, therefore, the UK will leave the EU in 2019, before the next General Election which (thanks to the Fixed Term Parliament Act) is due to be held in May 2020.

Hard Brexit or Soft Brexit?

With Theresa May committing to triggering Article 50, the argument has moved from, ‘will Brexit actually happen?’ to, ‘what sort of Brexit will we have?’

You’re going to hear the terms ‘hard’ and ‘soft’ Brexit an awful lot over the next few months. Not many people – including a few politicians – seem sure what they mean: so let’s do our best to explain them.

A Hard Brexit is the option favoured by those who were passionate about leaving the EU. It would mean the UK giving up access to the European single market and concentrating on making new trade deals, controlling our own borders and applying our own laws on trade – probably meaning much EU legislation would ultimately be scrapped. As far as trading with our former European partners goes, the UK would be governed by World Trade Organisation rules, not EU rules.

Soft Brexit would leave our relationship with the EU as close as possible to the existing arrangements and – not surprisingly – is the option favoured by many who voted Remain. The UK would no longer be a member of the EU – but it would keep unrestricted access to the European single market. Britain would remain within the EU customs union (‘Hard’ Brexit would see us leave the customs union) and our exports would not be subject to border checks, or to possible tariffs. This is a similar model to countries like Norway and Iceland, who are part of the European Economic Area. In return for this, these countries make payments into EU budgets and accept the “four freedoms” of movement of goods, services, capital and people.

There are obviously advantages and disadvantages on both sides – with, very often, the ‘advantage’ or otherwise being determined by your initial view on Europe.

The Significant Comments at the Conservative Party Conference

Both Theresa May and new Chancellor, Philip Hammond, made lengthy – and much-analysed – speeches at the recent Conservative Conference.

Hammond was the first to speak, and his speech seemed to suggest that his sympathies lay with a ‘soft’ Brexit. Promising “a new plan for the new circumstances Britain faces,” Hammond made clear his belief that leaving the EU was the biggest threat to the economy and seems prepared to use it as an excuse for significant spending.

He also stressed that Brexit would mean abandoning George Osborne’s promise of a Budget surplus by 2020 – and gave no indication of when it might be back on the agenda. The man nicknamed ‘Spreadsheet Phil’ by his colleagues appears to be someone who will not run any risk of the economy nosediving, even if it means sizeable Government spending. Hammond delivers his Autumn Statement on November 23rd when, I suspect, we will see further departures from his predecessor’s policies.

Theresa May’s speech echoed her Chancellor’s commitment to Government intervention. In fact, it went several stages further as she promised to “repair free markets,” declared her faith in old fashioned “industrial strategies,” mooted the energy price controls she’d ridiculed Ed Miliband for suggesting and pledged to put staff and customers on company boards. To the open disquiet of many business organisations, Theresa May’s government looks like one that will intervene in the market, and will do so frequently.

What does all this mean for markets, savings and shares?

Let’s tackle interest rates first, where Theresa May made one of her most interesting comments:

While monetary policy with super low rates and quantitative easing have provided emergency medicine, we have to acknowledge some of the bad side effects. People with assets have got richer, while people without have not… A change has got to come and we are going to deliver it.

Many commentators interpreted that as an attack on the low-interest rate policies of Bank of England Governor Mark Carney – who has himself suggested that Brexit would lead to higher interest rates. Speaking before the Referendum, Carney had indicated that the Bank of England would raise interest rates in the event of Britain leaving the EU, as investors would demand greater return for a perceived increase in risk.

What about stock markets? As George Osborne repeatedly stressed, the UK can never be immune to what is happening in the wider world and – Brexit or no Brexit – events such as the slowdown in China are going to impact UK businesses and markets.

Despite predictions to the contrary, the FTSE 100 index is up since the Referendum. The FTSE closed June at 6,504 and towards the end of the first week in October, stood at 7,064 – up 8.6% and tantalisingly close to its all-time high of 7,104.

The pound, however, has gone in the opposite direction. On the day before the Referendum, the pound – boosted by expectations that Remain would win – traded at $1.48. A week later it was down to $1.32 and then hovered around the $1.30 level until Theresa May confirmed the triggering of Article 50, at which point it fell further, to around $1.27.

A falling pound is good news for British exporters and the British tourist industry: it’s bad news for imports and for anyone who holidays abroad. Goldman Sachs had predicted a fall of 20% in Sterling if Britain left the EU: that would suggest we’ll ultimately see the pound trading at around $1.20.

Markets – both stock markets and currency markets – are going to be volatile as the UK continues to negotiate its exit from the EU. The only certainty is uncertainty: if you exclude Greenland leaving the European Economic Community in 1985, no country has ever left the EU. No one knows how the negotiations will proceed, what the attitude of our present European partners will be or how next year’s French and German elections will impact the talks.

What we do have, though, is a Prime Minister and a Chancellor who seem prepared to intervene in markets much more than their predecessors and to use Government action to protect savers and investors. Whether they’ll be able to do that in the face of international markets remains to be seen – but they are determined to try.

As the Chinese famously say, “may you live in interesting times.” The next few months are undoubtedly going to be very interesting as the terms and implications of Britain’s departure become clear. Rest assured that, whatever happens, we will be here to answer your questions. We are never more than a phone call or an email away.

Posted In : Savings, UK, Europe, Market Commentary, Brexit