After The Speculation – The Reality
Skerritts View - August 2016
It’s a few weeks since we awoke on the morning of Friday June 24th to the news that the UK electorate had voted to leave the EU. The numbing disbelief was akin to the moment we found out as kids that Father Christmas wasn’t real. What could this mean? In the same way that it meant that we did continue to get presents on Christmas Day, the world has continued to turn for those of us living in the United Kingdom and beyond, but the complacency that we appear to have slipped into maybe a little premature. Some things will change, but by how much will be determined by a number of factors.
In the rapid reshuffle that happened within British politics immediately after the vote, Theresa May was clear that she took over as Prime Minister with the understanding that “Brexit means Brexit.” The appointment of Boris Johnson, David Davis and Liam Fox, three key Brexiteers, to prominent roles within Government signalled on the face of it clear intent to see through the wishes of the electorate. However, one can also point at her determination not to negotiate an exit until two years after Article 50 has been enacted, which may not be until January 2017; a lengthy window during which said Brexiteers could mess things up or for any adverse effects of leaving to become clear to those who had voted. Remember that of the 33 million Britons who voted, only 1 million more than the other voted to leave. Put another way, only 1 in 33 of those who voted to leave needs to change their mind in order for the result to be different should there be a next time. From an investment perspective, the rally that has been driven by those companies that benefit from a weaker Sterling could dwindle or even reverse should signs strengthen that leaving the EU wasn’t quite taking the shape that many had anticipated in June.
Ironically, the vote by the UK to leave the EU may have strengthened the resolve of the rest of Europe to remain intact, contrary to a number of opinions that foresee it as the opening chapter of a Nexit saga. Without doubt, European politicians for the most part are frightened of the consequences for themselves and we can expect some “sweeteners” across Europe for EU citizens as confirmation of why the EU is such a good thing. Any problems that the UK encounters will also be highlighted and held up as an example of what such disloyalty can bring.
The underlying fact is that if there was no shortage of post Brexit uncertainty and turmoil in the days following the Referendum, it would be ten times worse if the next leavers had to extricate themselves from the single currency as well. The Greeks showed in their own Referendum last year that the cords of the single currency bind voters very tightly to the concept of better the devil you know when a decision has to be made, however noisy the protestations sound. We would be surprised if any other country was to leave in the next few years, but next year’s French and German general elections as well as the Italian constitutional referendum that is due to take place this October will provide much ammunition for Nexit theorists.
With so many important ballots due to be held in the coming period, it is hard to see any government increasing or even maintaining its stance on austerity. If we are right, fiscal loosening across Europe will probably be beneficial for the various markets that make up the European universe, and our portfolios will continue to tilt towards the region in the coming months, particularly as it is still trading generally at a discount to other developed markets.
The rise of populism such as that displayed by the UK electorate can be seen across the globe, not least in the United States. The improbable has been replaced by the unthinkable as the most probable outcome. Donald Trump began as a reality show caricature, yet he could realistically become one of the most powerful individuals in the world in less than three months’ time. The bookies and “smart money” failed to anticipate a Tory majority or a Brexit vote. Fact is indeed becoming stranger than fiction.
This can all be linked to what we described previously as the rise of the Superstar economy – where a very few are succeeding spectacularly in today’s economic backdrop while the vast majority are static, or going backwards. The rise in populism can be linked to the retraction of globalisation, the force that has endured for the past thirty years or so.
Globalisation has increased the supply of labour across the world, at the same time as advances in technology and robotics have squeezed the labour force as well. As wages have generally stagnated in the new era of deflation that we find ourselves, costs of education, childcare, healthcare and housing have kept rising. In 2008 the great credit bubble that had fuelled two decades of expansion burst in spectacular fashion, leaving consumers nervous about taking on any further debt, despite years now of record low interest rates which, improbably, keep going lower when it appears that lower is no longer an option.
China has emerged as a global force on the back of globalisation at the same time as the US has retreated from its role as the world’s policeman by withdrawing from the Middle East, coinciding with the resurgence in Russian nationalism and the turmoil within Europe with which we are all very familiar. In short, there is no global coordination of fiscal response to the deflationary woes in which we find ourselves.
But it is the need for politicians to heed the disquiet of the people that could signal the beginning of an inflationary twitch (possibly nothing more exciting than that) which could have adverse effects on global bond markets, but which could offer investment opportunities for those willing to consider inflation linked bonds once again.
We’ve heard about the prospect of “helicopter money” in Japan and even, more recently, in Europe.
There is a willingness to spend more on infrastructure projects using public funds which, since 2008, had been firmly shackled. A realisation is happening that you can only keep cutting for so long. It is no coincidence that George Osborne was very swiftly removed from his post as a sign of a “new broom” coming in to look at our nation’s finances.
In the US, both the most unpopular Presidential candidate of all time and the second most unpopular Presidential candidate of all time have each said that they will raise public expenditure and thus ignore the rising deficit should they be chosen as the least popular President of all time.
And in the same way as Mario Draghi merely had to say that he’d do whatever it takes to protect the Euro, there is a school of thought that suggests that if policymakers merely said that they were raising their inflation targets from the currently unachievable 2% to a figure somewhat higher this might have the desired effect of signalling that there was serious intent towards ending the increasingly damaging environment that has led voters across the world to paraphrase that famous line from The Life of Brian – “what’s globalisation ever done for me?”
It feels as though we are embarking upon the next leg of the post global crash of 2008. Quite what the world will look like five years from now is unclear, but each day will reveal just a little bit more. We’ll continue to keep a flexible and open mind towards our investment strategies as we progress.
Sources - BCA Research July 2016
These are our views, as always, and don’t constitute advice in any way.
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