Alexander Beard Group’s EU Referendum summary and viewpoint
by Alexander Beard, on Jun 29, 2016 9:44:34 AM
Britain Takes Back Control. Or Does It?
This somewhat, necessarily, lengthy note covers the likely consequences of Britain’ historic decision. It our attempt to give you an overview of how things currently stand following the Leave campaign victory; but you will appreciate that events are moving very quickly.
- ‘I declare that the total votes cast for Remain were 16,141,241. The total votes cast for Leave were 17,410,742.’
- ‘I will do everything I can as Prime Minister to steady the ship… but I do not think it would be right for me to be the Captain.’
These two announcements, coming little more than an hour apart, sent the UK political system and its economy into wholly uncharted waters and sent stock markets and currency markets around the globe into turmoil.
There was a majority of over one million in favour of Leave, and – despite a petition calling for a second referendum passing the two million mark over the weekend – that appears to be that. And as several European leaders have said, ‘out is out’. The ‘most complicated divorce in history’ is about to start.
The Instant Reaction
Both the FTSE 100 index of leading shares and the pound rose steadily throughout Thursday, as the markets anticipated a win for Remain. The bookmakers reported several six-figure bets on the status quo. However, as the early results came in and it became apparent that Leave had done far better than expected, both the pound and FTSE Futures (trading in the Far East) went sharply in the other direction.
The FTSE fell by 8% after opening in London, with shares in banks and housebuilders being especially badly hit: at one point shares in Barclays and RBS were down by more than 30%. By the end of trading, the FTSE had bounced back and it closed 2.8% down on the day at 6,139. To give that some context, the FTSE ended 2015 at 6,242 and finished both January and February below that level. Supporters of the ‘business as usual’ school of thought would also point out that the FTSE finished Friday 17th June at 6,021 – up 70 points on the day. If you follow that line of thought then the prospect of Brexit was worse for the stock market than the reality.
The pound was also hit sharply. Having been as high as $1.50 on Thursday, it touched levels on Friday that hadn’t been seen since 1985, at one point falling by 10% to $1.33. It finally closed the day down 9% at $1.36. In early trading in the Far East, on Monday 27th the pound was continuing to fall against the dollar but since then has recovered ever so slightly.
In truth, there was always going to be a sharp reaction, whichever side won. But with Leave having triumphed, the next few days and weeks will be especially critical. Bank of England Governor Mark Carney will undoubtedly be a key figure. He says the bank is ‘well prepared’ and he stands ready with £250bn to pump into the banking system: whether that would be enough to stand up to market sentiment and determined selling of sterling by the hedge funds remains to be seen.
George Osborne – the UK Chancellor and a man whose political ambitions appear to have been fatally wounded by Brexit – will make a statement at 8am on Monday, seeking to provide reassurance about the UK’s economic and financial stability.
The reaction around Europe
There was a pre-Referendum boost for the Leave camp when Markus Kerber, the head of Germany’s equivalent of the CBI, said that post-Brexit trade barriers would be ‘very, very foolish.’ The UK is a highly significant market for many German and continental firms, and when the decision was announced there was plenty of conciliatory language. German Chancellor Angela Merkel was quoted as saying ‘there is no need to be nasty to Britain’ over the ‘divorce’ terms.
However, pressure continues to build for the UK to give notice under ‘Article 50’ and immediately begin ‘divorce’ proceedings. EU President Jean-Claude Juncker said it ‘would not be an amicable divorce’ – but then again, he claimed, it had never been ‘a deep love affair’. Enough off the emotive clichés please!!
Several right wing groups across Europe saw Brexit as legitimising their own calls for referenda on continuing membership. But pro-Europe groups were also opening the champagne, claiming that the UK had always been a brake on further European integration and cooperation.
The UK’s credit rating
One of the first casualties of the Brexit vote was the UK’s credit rating. Credit ratings agency Moody’s cut the outlook for the UK’s credit rating to negative, saying that the result would herald ‘a prolonged period of uncertainty’. This is certainly one of the most arguable statements and only time will tell; personally I am optimistic that the pragmatism and entrepreneurialism of business will overcome and things will be back to normal as soon as possible; this doesn’t decry the difficulties ahead but I’m with the head of the German CBI – see above comments
So what happens now?
First and foremost, the UK needs a new Prime Minister. Jeremy Corbyn’s position as Labour leader is also in question, but it is the next leader of the Conservative party who will be negotiating Britain’s exit from the EU. The early frontrunner is Boris Johnson, supposedly in a ‘dream team’ with Michael Gove. At the time of writing, Home Secretary Theresa May is emerging strongly as the only credible alternative to Boris. May supported Remain, but did so very, very quietly. I believe such is the strength of grassroots Tory appeal that the only way to stop Boris winning is to keep him off the final two candidates offered to the Tory membership; if he’s on that list he wins!
David Cameron has said that he will stay on until October. However, it may be that events force him to step aside rather more quickly. Several European leaders are now calling for a ‘quickie’ divorce and the world’s financial markets are unlikely to grant the UK three months to find a new leader. You can see an argument that Cameron is now the lamest of lame ducks and on that basis it may be hard for him to continue in office until the Autumn.
Cameron appears to want the next PM to invoke Article 50 – the formal process giving two years’ notice of our intention to quit the EU. Should the process not be completed within two years, then it can only be extended with the consent of all the other EU members.
Cameron had said that Britain would immediately invoke Article 50 – but the uncertainty of his own position calls this into question. If he is replaced by a pro-Brexit candidate (as seems likely), he or she is likely to argue that Article 50 works against the interests of the country leaving the EU: the new PM may seek a period of informal negotiation first.
As mentioned above, however, if there was one clear trend that emerged over the weekend, it was the desire of many European leaders to see Brexit happen quickly. They fear that an amicable, drawn-out settlement would simply encourage other countries to seek their own version of Brexit. David Cameron is due at a European summit on Tuesday: he can expect to hear ‘get on with it’ in several different languages.
So, the most important question for most people - How will Brexit affect your finances?
At this very early stage, the full impact of Brexit on our personal finances remains unclear, but we can already observe the following points.
The Pound and Prices
If the pound continues to fall then importing goods from other countries will be more expensive. This will push prices up and lead to a rise in inflation: but it’s good news for exporters as their goods become cheaper to buy and that helps the economy overall, brings in tax revenue from greater profits and helps sustain and create employment
Wholesale petrol prices are quoted in dollars, so as the pound falls against the dollar, petrol prices will rise. The Petrol Retailers Association are already talking of a rise of 2-3p per litre.
Savings and Investments
Without question, the biggest threat to the stock market and your savings and investments is a prolonged period of uncertainty - the one thing markets hate above everything else. Assuming everything is worked out relatively quickly then the stock market should return to a normal pattern of trading – and as George Osborne will say today, the fundamentals of the UK economy are relatively strong. We certainly cannot assume that Brexit would be bad for shares: in the long run the stock market will be affected by events around the world – China’s economy, growth in the Eurozone, the outlook for the US – as much as it will be affected by Brexit.
Clearly any rise in interest rates (see below) would be good news for savers.
Interest rates and Mortgages
Before the Referendum vote, Remain were saying that a vote to Leave would push up borrowing costs, leading to higher mortgage payments and increasing renting costs. But if Brexit were to lead to a period of low growth then interest rates could be cut (and I think will be) in a bid to stimulate the economy. David Tinsley, UK economist at UBS, has said that he expects two interest rate cuts from the Bank of England over the next six months, taking rates from the current 0.5% to zero.
There appears to be some consensus that Brexit could lead to a fall in house prices, especially in London and the South East. The Treasury has spoken of a fall of 10-18% over the next two years. Clearly not good news for existing homeowners, but anyone with children struggling to get a foot on the housing ladder may take a different view.
During the campaign, George Osborne gave dire warnings of tax rises in the event of a victory for Leave. This would be directly contrary to the Conservative’s election pledge and would be difficult to implement: much more likely is an extension of ‘austerity’ for a further two years beyond 2020. He repeated a somewhat watered down version of this warning on the BBC Today programme on Tuesday morning.
David Cameron did claim that a vote to Leave would threaten the ‘triple lock’ on pensions, but this presumes a poorer economy and a lower national income. If economic performance did deteriorate after Brexit, then the Bank of England might opt for a return to Quantitative Easing (QE) and/or lower interest rates. More QE would push down bond yields and with them annuity rates: so anyone buying a pension annuity would get less income for their money but that’s been a steady decline anyway for some years without this and annuities have become much less popular.
What will the UK’s relationship with Europe be when the dust has settled?
Impossible to say! As of Tuesday, the Labour party was in turmoil with over 20 members of the Shadow Cabinet resigning. Reports suggest that pro-Remain MPs may attempt to block the decision of the Referendum. SNP leader Nicola Sturgeon is also threatening to veto Brexit and is demanding a second Scottish Independence referendum (now there’s a surprise!!).
But let’s assume that Brexit goes ahead. The more rational Leave campaigners have been at pains to stress the UK’s links with Europe: the sensible and pragmatic European leaders (code for Germany) will not risk losing such a big market, especially as Europe moves slowly out of a recession. My best guess is that the UK will leave the EU (and quite quickly) but will retain some sort of ‘associate’ status. This would involve the UK making some contribution to the EU budget, accepting some of its trading rules and doing its best to control immigration with a points-based system, all things which potential Prime Minister-in-waiting, Boris Johnson, has started to discuss publicly and let’s be frank here, things which Cameron could and should have achieved and a better all-round outcome for a Eurosceptic such as myself.
In the best traditions of politics and darkened rooms, a compromise may be reached – with both sides spinning it as a win. Will it work? No one knows; but when the dust finally settles, we may find that ‘out’ was not quite ‘out’ after all.
The next few days and weeks will be interesting, to put it mildly. We appreciate that our clients may have concerns and questions, so I have set out below views from colleagues running all our current EU operations which make for interesting reading.
Please don’t hesitate to get in touch with us at any time.
The vote was not a response to economic difficulties but more the result of an internal political game in Great Britain. The Prime Minister initiated the referendum in order to confirm his legitimacy in the UK and also within his own party. The voters, whose choice we must of course respect, expressed their views on social subjects, such as immigration (often presented in exaggerated ways, such as Turkey taking a seat at the heart of Europe), rather than on the future of the European Union. In essence, it is surprising that Great Britain took such a decision after having made strong contributions in recent years to the EU on questions of free trade and also the opening up to Eastern European countries. It has also made contributions to EU laws, including those in our own industry (including international accounting standards, savings protections - some of which have been quite restrictive!). Furthermore, it has left the EU at a time when it has benefited from a number of concessions and appears to be in a good economic situation (low unemployment, a dynamic finance sector and industrial growth).
The Dutch were as much surprised by the outcome of the referendum as the rest of world. One might question that the fact that we all were surprised by the outcome is exactly why the UK voted against staying in the EU. A growing majority of people are not being heard by politicians and these referenda seem to be used more as a protest vote than for a debate based on facts and vision for the future. The Brexit result may hopefully result in an open discussion about how much EU reform is required without allowing the populist movement to use adverse sentiment for their destructive campaigns. The Netherlands has always relied on strong trade relations with our surrounding countries and an open mind to other cultures. Being one of our most important trade partners, we have no other expectations than that the UK and The Netherlands will soon agree on new treaties between our countries about trade, work, fiscal legislation and financial services passporting. Now we should not focus on the negatives, but on the opportunities this outcome gives for the EU to reform itself for the better.
We were surprised by the result. London is a very international city with huge cultural diversity. Economically it is a major contributor to the economy and the treasury’s purse, and as a city it voted strongly in favour of Remain. Our hope is that not all of the Brexit fears will materialise, and that the negotiations will progress quickly to establish the new ‘normal’ from which London can continue to grow. In particular for the finance sector we would like to ensure that the UK’s financial services passport remains intact to preserve London’s place as THE global financial city (the passport allows financial services to be sold in the single market). It’s likely to be a difficult period of change, so the sooner it is over the better. That said, we are confident that there will be plenty of goodwill in the political discussions and that there will be a good outcome for the UK and Europe.
At the end of WW2 France, the Netherlands and Germany cooperated to construct a vision for a “New Europe”. People like Hallstein and Monet, Schumann, De Gaulle and Adenauer had tried to bring “the people in Europe” closer together in order to create a lasting peace throughout Europe. However, over the years the institutions had been set up and the ‘vision’ they had, have step by step drifted apart from what “the person in the street”, especially those advsersley affected by the loss of old traditional industries.
The U.K.’s vote for Brexit has undoubtedly been a wake up to EU bureaucracy! On both sides of the Channel there is the need to create a more “social market economy”. In Continental Europe there might also be the need to re-think, what the model of cooperation and integration should be in the future and what could be taken back by individual countries in a system of subsidiarity.
There is a real risk that the voters in the U.K. have fired the first shot in a political war that will resonate throughout the EU member countries and create a risk of nationalists and populists increasing their political influence to take over the leadership in certain European countries. All the EU’s current leadership need to work together to avoid this risk.
Even knowing that U.K. and Germany have the strongest economic relationships, it is difficult to see how current trade cooperation can continue if EU designated minimum conditions will not be accepted: freedom of choice for students, for setting up a business, for freedom of employment. One cannot gain without helping others – give and take are two sides of the same coin. Mrs Merkel is still a strong leader and a strong European but a pragmatist and whilst there is no need for a rush there is the necessity to regain certainty and stability.
I also anticipate that the merger between Deutsche Börse and LSE will be affected if they can now not agree having the HQ in London. Many such corporate decisions may be ‘parked’ for an interim period.
But we will all have to be an uncomplaining patient! I doubt that rules will be set up fast - so uncertainty and volatility on the markets may remain for a period – nevertheless it is a chance for renewal of good ideas and projects.