Yesterday we saw a rising pound and markets shored up by polls indicating that Remain was likely to prevail. Then, like the plot in “Sliding Doors”, an alternate reality took over. The vote to Leave sent markets sliding, the pound tumbling and the movement was all the more extreme because of the about-turn from last minute polls to the actual result.
The good news is that uncertainty about the referendum is over. But there are still some differences of opinion about what the implications will be. The result was 52% “Out” and 48% Remain” - hardly a consensus. So let’s review the implications from the two main perspectives.
We have crossed one major part of the prevailing uncertainty, but there may be more to come – especially in the UK. On the political side, the possibility of independence referendums for Scotland and Northern Ireland and a change of political leadership on the left and the right creates further uncertainty. There are also elections in the US to come and potential for other EU members to seek referendums.
On the business front we are likely to see a huge range of reactions. Some businesses will be more prepared than others to weather the storm, and others still may find new opportunities. We may see some global businesses shift headquarters swiftly – and perhaps the Banking and Finance sector is most vulnerable to this. Some investment projects will be withdrawn or put on hold, and some recruitment decisions will be delayed to see how business is affected first.
Trade negotiations between the UK and its various trading partners will take some time to settle, and this could also defer growth prospects until the shape of deals become clearer.
The Pound could continue to slide. Whilst this would help exporters the UK is a net importer of goods and so we may see rising inflation – but not the sort that increases profits in the UK. A falling pound could also trigger a credit rating downgrade for the UK.
The result of these factors could then be a recession, two consecutive quarters of negative growth in GDP. If stock markets are more swayed by these fears then they may enter a prolonged period of flat or negative returns. It’s not all bad, though; falling stock markets can be accompanied by rising bond markets, good news for cautious investors. Also, a weakening pound makes overseas investing more appealing.
Singing in the Rain
The Leave campaigners did not promise that a recession would be avoided, it was not about short term economics. It will be hard to avoid all of the fears listed in “Apocalypse Now” above, but no doubt there will be some who end up “Singing in the Rain”.
Business may not like uncertainty, but it is not a fan of red-tape either. If the UK can strip some of the red-tape away, business may re-set and push forward quickly. Economic growth could return faster than anticipated. There are also many who anticipated a Brexit and who are, in some respects, already prepared for the next phase – and such businesses could be the first to adapt and thrive.
Meanwhile, the “Remain” campaign also recognised that the EU has its flaws. A shock like Brexit can be a catalyst for change, so it is possible that European economies will benefit from reform and bounce back.
Finally, there is the human element. As a student in France, a French Philosophy teacher once told me how much he admired the British entrepreneurial spirit. Companies and people do find their own way of overcoming obstacles.
Should the optimism of black and white cinema win the day, investors may just catch a wave at the right time.
I never thought financial matters made for exciting films, except when studying mortgages and thinking the term “Equity of Redemption” would make a great film title. Moneyball is a good example of how a clear head, solid analysis and a studied approach can help. There wasn’t much finance in it, but it’s based on a true-story about baseball, where one team used some of the statistical techniques of investment managers to pick teams, rather than the gut feel of coaches, to great success.
I cannot over emphasise the importance of keeping a cool head, maintaining a diversified approach and sticking to tried and tested processes. Of course be prepared for some ups and downs in values in the short term. But if you are investing for the medium to long term (over 5 years) the probability of success is still weighted in your favour.
Hitch-Hikers Guide to the Galaxy
You should not take any action or refrain from taking any action in response to this article. You should seek professional advice on such matters. Investment values can fall as well as rise and you could lose money.
Investment Director and Partner