To Brexit or not to Brexit? – that is the question

by Alexander Beard, on Feb 24, 2016 3:32:24 PM

If you have any views on the following please do engage with me through pdb@abg.net

1. How did we arrive at the present situation?

The glib response would be “have you got a week?” but to bring it down to its basic level, it seems to be a case of “realpolitik“, at the recent General Election David Cameron had little choice but to offer the citizens of the UK a referendum on our future membership of the European Union.

Whilst I doubt he would ever admit this, it was partly as a result of the rise in popularity of UKIP (which interestingly enough seemed to damage the Labour Party more than the Tory Party at the last Election), growing unease within his own ranks which had been resurfacing over the previous 5 years of the Coalition Government, and a toxic mixture of the Greek debt crisis and serious (justifiable, in my opinion) doubts about the single currency project. Mix this with the previously unforeseen refugee crisis and growing unease over immigration and Cameron really had no choice.

2. What did Cameron achieve in Brussels and has this changed how we may vote?

In simple terms:

  1. An agreement that Britain could restrict certain Child Benefits and other Social Benefits for the next 7 years for new immigrants into the UK, dependent on a number of factors such as work status and how long they contribute to the welfare system through Tax and National Insurance Contributions. In practice it would seem (and according to Michael Gove and others) that there is a distinct possibility that this could be ruled illegal by the European Court of Justice. Even though Cameron has stated that this agreement is going to be enshrined in a United Nations treaty, it would appear that there is still some doubt whether this can be delivered in the form that he had hoped without full EU treaty change.
  2. He seems to have obtained agreement from all Heads of Government in the EU that Britain will never join the Euro, but let’s be honest we were never going to let that happen anyway!
  3. Similarly he seems to have gained the same agreement that we will never be forced to be part of a wider political union, but again, ditto the above comment.
  4. He also seems to have limited, if not ruled out completely, Britain making any further contribution to European bail-out funds should a new Greek-like debt crisis occur again.

Many people, largely on the Brexit wing, suggest that these reforms really amount to nothing more than window dressing, given that the fundamentals of the anti-EU protagonists are that we need to remove Brussels from all aspects of UK law making and the only way that this can be done is simply by leaving the EU.

There is no half way measure on that, so depending on which side of the fence you are on, you either think Cameron has improved Britain’s position (which undoubtedly to give him credit, he has) or as I suggested above, you think that this is merely window dressing in an effort to persuade the Country to vote for the status quo. I guess it depends on your political affiliations and possibly your level of cynicism?

3. The in’s and the out’s – a guide to who’s in and who’s out.  

In political terms first:

Most of the Cabinet are ‘In’ but significantly Ian Duncan Smith, Michael Gove, Chris Grayling, Theresa Villiers and Priti Patel have opted for ‘Out’ and given Michael Gove’s wide-ranging respect in terms of his honesty and intellect within the Tory Party this is undoubtedly going to influence many Tory MPs.  According to the BBC this week, at the last count at least half the Tory MPs are going to vote for out and it could be an even greater number.  If the Country votes to stay in then quite how Cameron is going to patch all this up post the Referendum is another matter and it is not beyond comprehension that civil war could again break out within the Tory Party, whatever the result.  This obviously leads to questions about Cameron’s future but it would seem that if he wins the Referendum then he is secure to the end of this Parliament when in any event he intends to leave the stage.

Most significantly the last few days have seen the emergence of Boris Johnson as the possible standard-bearer for the Brexit Campaign and even though Michael Gove is widely respected within political circles, he is not the sort of figurehead that the wider population respond to; clearly Boris is. It is extraordinary that whilst he represents an archetypal Tory ruling class description e.g. Eton, Oxford etc., he is widely liked by a wide spectrum of the public from both left and right and it is no accident that he secured two terms as London Mayor in a City which has consistently voted Labour in General Elections for as long as one can remember. (Dave & Boris pictured right)

Boris’s move is undoubtedly a blow to Cameron as people will listen to Boris, rightly or wrongly, but again the cynic would observe that this may be simply Boris making a pitch for the leadership should Cameron loses the Referendum. Perish the thought!

At the moment the “In” campaign is led by David Cameron and a number of significant figures in the Cabinet, as well as broadly supported by the Labour Party and Alan Milburn being the leading Labour  ‘In’ campaigner, again a man widely respected and liked, across the political spectrum.

Others:

Earlier this week 30+ Chief Executives of FTSE 100 listed companies wrote to The Times suggesting that 000’s of jobs will be at risk if we leave the European Union, but I for one question this for the simple reason; Europe does twice the amount of trade into Britain than we do the other way around, does one really believe that companies like BMW, Siemens and many other great European corporates will want to see their access restricted to a lucrative British market?. We are still the fifth biggest economy in the World.  There are many FTSE 100 CEO’s and possibly the majority of small to medium sized business owners who would opt for the exit route at the forthcoming Referendum for no other reason than to remove a significant amount of red tape. One significant sitter-on-the –fence is Willie Walsh CEO of the International Airline Group that owns BA, Iberia and Air Lingus who basically said “I don’t really care, it won’t affect my business” and that could be true for many; the danger for the ‘In’ campaign is apathy, it will damage them more than the ‘out’ campaign whose supporters, in spite of not their divided leadership, seem far more vocal and motivated.

4. What will happen? When will it happen? and will anything change immediately?

So what will happen?

A serious and continued bout of political overkill and sheer boredom over the next 3 months whilst every newspaper we pick up, every news programme we see and many other blogs, posts and tweets go into ‘Euro-hype’ and will be dominated by the daily toing’s and froing’s of the In and Out campaigns.  Clearly the Out Campaign needed a significant figurehead and now needs unity of voice and this I believe will be delivered by Boris, although he has said he will not go head-to-head with David Cameron.  Nigel Farage may be side-lined due to his, shall we say, difficult public personality, but he does represent (as indeed do both Trump and Sanders in the USA) the views of a significant section of the voting public who feel let down by the current political class, but Farage’s style will not be encouraged by the other leaders of the Exit Campaign.

We all know the date of the Referendum is June 23rd. It is received political wisdom that you do not have an Election close to a major sporting tournament where your Country could be eliminated. In 1970 Harold Wilson rued the loss to West Germany in the quarter finals of the World Cup and a few days later lost an Election that he was expected to win. It is nonsense to suggest that that was the reason but there is no doubt that sentiment does play a part and the referendum, coming as it does only 4 days after England, Wales and Northern Ireland learn whether or not they have got to the next stage of the European Football Championships should one or more of the Home Countries (particularly England) be eliminated then this could increase the anti-EU sentiment, whereas the reverse could also apply.

What could have a significant effect on people’s voting intentions would be any serious deterioration in the debt or bank positions of a number of EU Countries such as Greece and Italy, placing further question marks on the future of the Euro and therefore the stability of the EU itself as a political organisation; the same threat to a Cameron led victory for the “in” campaign would come from any significant upsurge in the refugee crisis. Like it or not, it affects some people’s views. (Tusk pictured left)

So, on the day after the Referendum should Britain votes to stay in then pretty much life goes on as normal, the same group of disaffected Tory MPs and Cabinet Ministers will continue to fight and who knows where that will lead, but they are ‘fortunate’ to have a very weak opposition with a Leader who probably could not lead the Labour Party to a General Election victory; however if we vote ‘out’ then the next 2 years will see a series of negotiations on the terms for Britain’s exit.  The big question mark will of course surround trade but as I have said before in this note I cannot see major European based companies allowing the Euro politicians to restrict their access to the British Market or vice versa, we are simply too important in that sense and many people in the ‘out’ camp will relish the opportunity for Britain to negotiate its own trade deals with Japan, USA, China and other countries which previously had been the purview of the EU.

There is of course one looming ‘elephant in the room’, which is Scottish Independence. Nicola Sturgeon has made it clear that if the majority of Scottish people vote to stay in, within a contrary successful Brexit Campaign, then she will use this as good reason to campaign for a further In/Out referendum as the Scottish people have clearly shown their preference for remaining within the E.U., and it could be very difficult for that call to be resisted.  It seems to me, and this is purely a personal opinion, that if that comes about then the second time around the Scottish people would probably vote, albeit by another narrow margin, for independence then I will be writing another note sometime in the near future on the pros and cons of that.

5. What are the implications for you, your investments and your Financial Adviser – after all we are a Cross Border European Business.

Finally, where does this leave you with your investments and your Financial Adviser? Well, a period of uncertainty is probably not going to be good for stock markets in the short term, an immediate fall in the markets as a result of an exit vote is to be expected but in the medium to longer term maybe 3-6 months after the referendum, then they will recover, because frankly, life goes on, it’s “business as usual” and people will forget the longer term implications of an exit until they start to see what the outcome of the exit negotiations are and how it might affect trade, balance of payments, the exchange rate and other factors which weigh upon daily share values.

We have already gone through a period of uncertainty from the beginning of 2016 onwards resulting from the crash in crude oil prices, slowing growth in China, Syria, threats from Russia etc., but markets in the last week or so have started to recover slowly and show signs of life again, although immediately following Boris Johnson’s announcement the £ fell quite sharply against both the Euro and the US$, but some would say it was slightly overvalued in the first place.

It will be a turbulent time – not just for markets but also for currencies – which has the potential to exaggerate returns up and down.  There will be a lot of sentiment affecting the markets, rather than rational economic of financial considerations, and it all needs to wash through the system before things are clearer.

The best thing to say would be to stick with the process, maintain diversification – because when things move (up or down) it will happen faster than you can get your money in or out of the markets.  Normal service will resume at some point after the referendum, it might take a little longer for this to happen if the result is a “no” simply because there will be a period of change to negotiate.  As a medium to long term investor it can be said that you are almost certainly better off ‘in’ the markets than ‘out’ as long as you have enough time to recover from falls in value.

I hope this note (which is far from comprehensive) answers some the questions that you may have had and I would be interested in the points of view of any of our clients be they in or out in the great referendum to come.

Many thanks for listening and please do email me with your opinions on pdb@abg.net

I’d love to hear them

Paul Beard
Founder and Executive Chairman
The Alexander Beard Group of Companies Limited.

Topics:Alexander BeardBrexitEuropeUK