A Background

In our view, the media has largely overblown the economic and investing risks associated with Brexit. Yes, there will be change, but there will also be opportunities as a result of the panic of others.

The United Kingdom will definitely leave the European Union under the Aricle 50 of the Treaty on European Union. Since Article 50 was triggered, Britain has until the end of March 2019 to negotiate an exit with other European Union states. Prime Minister Theresa May has repeatedly stated that she wants two things: first, to keep the cost of the divorce as low as possible, and second, wants a trade deal that will protect Britain’s access to European markets. EU officials say that the divorce bill must be settled and the terms of exit agreed before any deal on trade and future relations can be agreed. There have been figures such as EUR 100 billion thrown around for Britain’s bill. This figure is simply not practical and highly unlikely. Because the UK imports more from the EU bloc than it exports, it is very likely that EU countries will do their best that trade go uninterrupted.

There seems to be an assumption that European leaders are obsessed with Brexit. They are not. For example, let’s have a look at French President Emmanual Macron’s to-do list: first, has to win the national assembly elections; second, he has to push through French economic reform; third, he’s got to get the German leadership to a more accommodating position on the fiscal policy of Europe. Brexit is something that he can afford to leave to the technicians in Brussels for the next two (2) years and simply stick to the position of the EU—that it cannot be shown to be beneficial for any country to leave the EU. France and Germany are strong believers in a more coordinated Europe; more Europe, not less Europe. There is no reason for Macron to veer away from this stance.

British companies can largely deal with whatever Brexit arrangements there will be so long as they are known ahead of time. What British companies fear is the uncertainly about what the arrangements will be and the prospect of a cliff edge, i.e. by March 2019, no agreement has been reached and thus defaulting into a no agreement position. Also, losing a free trade with European countries opens up the potential for free trade agreements with other countries, the United States being the foremost candidate.

Our team of economists and analysts are closely monitoring and comparing the facts and the rhetoric in the media. So far, we have seen a large disconnect in what has happened versus the predictions being published daily. Many economists (even those in support of Brexit) were expecting an almost immediate recession. This was just wrong; there was even a strengthening that occurred post Brexit.

We have been closely monitoring the activity of many Blue Chip stocks. Since the devaluation of the pound, British companies with a large proportion of their earnings coming from foreign sources have been on of the big winners post Brexit. Many commodity companies (Glencore, Antofagasta, etc) have seen an uptick in earnings and will most likely have very strong years.

 


On Britain’s Economy

Pre-Brexit, the Remainers (those against Brexit) were saying the immediate effect of leaving the European Union would be terrible both in the short and long term. Britain would immediately enter a recession. Even Brexit supporting economists were worried about a jolt to the UK economy.

How has Brexit affected Britain’s economy thus far? There was no recession. The economists got it wrong. In fact, the UK economy actually even sped up after the referendum vote. One of the key things that politicians and economists (on both sides) got wrong is the assumption that there would be a massive confidence shock after the vote to leave the EU. As a result of this confidence shock, business would immediately stop investing and hiring; consumers would immediately stop shopping and spending. Economists and politicians were adamant that the same sort of behavior that companies and individuals exhibited during the fall of Lehmann Brothers would return.

What economists missed, is that the majority of British nationals voted for Brexit! If majority of individuals voted in favor of Brexit, why would they thing it was a bad thing? The reality is that consumers continued to spend. Business continued to invest. Employers kept hiring people (employment ticked up to an all time high.)

Many employers have stated their concerns that in a post-Brexit economy, they will no longer have access to skilled and unskilled workers from the EU. This will force employers though to learn how to run their businesses differently. Yes, the low paid, low productivity jobs will likely disappear. However, companies would be forced to hire more young British people, invest in workplace training, grow their own talent, and pay their workers more. Effective and forward-looking companies are already doing this anyway, Brexit will simply accelerate this process.

The financial services industry in London has been used as a case study many times as potentially a victim of Brexit. That highly paid (potentially over paid) financial service professionals won’t be able to passport across Europe and won’t be as competitive in their pricing compared to other European professionals in the industry. This overstates the importance and contribution of financial services to the British economy. To put the City of London’s GDP contribution in perspective, the contribution to the British economy is only 3%.

The manufacturing industry is certainly a bright spot in a post-Brexit British economy. The Sterling as fallen and manufacturers have already enjoyed a lift in profits since their exports are much cheaper and more competitive. The British economy has relied in the past quite heavily on financial services and so the increased share of manufacturing in the economy should actually be quite welcome.

Will there be industries and companies that are adversely affected by Brexit? Absolutely. But burying one’s head in the dirt and remaining in cash is a sure way for inflation to eat away at ones savings. Find an experienced financial advisor, one who has gone through many market cycles and has the discipline to invest prudently but effectively. Subscribe to our newsletter for further commentary on how to capitalize on the impact of Brexit in the financial markets.