We have a tendency to take a dispassionate view of world affairs. It helps us avoid getting caught up in the hype that the media sells when things happen. When the unexpected happens, as it so often does, the initial reports and the initial reactions are often the opposite of the truth and have little relationship to reality.
We have some insight into European affairs for personal reasons and have always felt that the EU was an artificial construct in a continent that is home to so many disparate cultures. So we are not surprised that the whole rickety structure is showing signs of coming apart. But Europe has been the home of little countries and big countries for millennia and has thrived over that time. There’s no reason to think that the EU is either critical or even necessary. It has its uses but it also has its failures and it’s the failures that have grown larger over time. So finally, when put to a vote, the people on an island off the coast of Europe has decided it was time to declare its independence from the EU and reclaim their heritage.
We also found the commentary from Jenna Barnard of Henderson Global Investors compelling and wanted to share it.
While the result of the referendum “Brexit” last week may be the biggest political crisis in the United Kingdom since the Second World War, this is not a financial crisis in our view. Credit markets are not suggesting systemic risk at present as the banks are in a relatively healthy place due to rigorous regulation and stress testing over the last few years.
Clearly the result is a significant blow to confidence / “animal spirits” in the short term and will put a least a temporary break on growth in the UK and perhaps Europe. Bank share prices have also been hammered and their willingness to lend remains muted. European companies are therefore likely to remain relatively conservative – more about dividends and conservative balance sheets than share buybacks /M&A.
The Bank of England is planning to cut rates to 0% from 0.5% but the central bank doesn’t want to take them negative. We expect further credit easing – free money to the banks for mortgage lending (“funding for lending”), more QE possibly. We believe another central bank heading to the zero lower band fuels the global grab for yield.
The issue at stake as of today is HOW the UK exits. There are soft and hard version of exit with soft (maintaining access to the free trade area) being the preferable version for the economy. Today the leading “leave” politician in the UK (and likely the next Prime Minister), former Mayor of London Boris Johnson, has written his weekly column for a national newspaper that suggests a very soft form of exit; along the lines of Norway and Switzerland i.e. retain access to the free trade area. To do this the UK would have to agree to free movement of labor (to be clear, not people, but the labor market; new migrants would need a job to come to the UK).
We will continue to watch and advise you to events as they unfold. As we write these comments on Tuesday morning the US stock markets are up over 1% and the European markets are up over 3%. Reality is overtaking panic. If you have questions, don’t hesitate to contact us.