brexit

 

 

 

 

 

In light of the UK’s referendum result to withdraw the country from the European Union, and the subsequent short-term turmoil in the investment markets, I present some random Brexit thoughts and suggestions for investors and pundits on the situation:

  • I believe this event will play out well for Canada, in terms of politics and economics – it makes the country somewhat of a standout in the crowd in terms of sensibility, stability, and pragmaticism; diversity; and generally a good place to be living right now.  This could boost the country’s relative standing, certainly in terms of sentiment.
  • The result does not appear to be a good indicator for keeping the UK united – I am sure this will be a boost for Scotland’s independence movement.
  • Similarly, it presents worrying signals for the upcoming U.S. election (by that I mean the probability of a Trump victory).  Politics is being driven by populism right now, and populism’s foundation is based on sentiment and doctrine, not pragmatism, facts and science.  This is not good for stability, law & order, or various social issues.  (Nor is it good for predictions, because logic does not carry the day.)   Any American politician that does not recognize the danger of populism right now, as represented by this result, on economic and political stability is committing a grievous error in terms of their own agenda and success.
  • With respect to investments, as with any crisis, opportunities are created.  Short term market reactions are always over-stated, which presents buying opportunities for the long term value investor.  Short term, a good bet is gold – not direct investment in it, but using an ETF for exposure.  Long term, there will be some great buying opportunities over the next few days.
  • Investors should focus on quality, value-based investments that have a sustainable yield attached to them (dividend, etc.).
  • It is interesting that some commentators are characterizing these events as the revolt of the declining middle class against the elites.  However, I do not see the elites as particularly suffering the consequences (financially or otherwise) of bad political decisions.
  • The City of London will definitely suffer credibility on this (in terms of financial centre stature), meaning loss of jobs, declining influence, relative importance in the global financial system, etc.  The same undoubtedly holds true for political alliances.
  • Cameron made a serious political error.  Why he considered gambling the future of the country on a referendum question where winner takes all is the big question.  Why should such an all-encompassing issue be decided on a 50%-plus-one basis, especially in a country that has no legislative basis for a referendum (much as referendum by majority should not determine policies for the minority, especially with respect to human rights issues)?  Referendums are a better tool for the underdog than for the party in power.  He will certainly go down in the history books as making one of the greatest political blunders in the country’s history.
  • As with any crisis, there are bad outcomes and good outcomes.  The falling pound is not necessarily a bad thing for some areas – good for exporters and price competition, will keep interest rates low (and hence the focus on quality yield-based investments), will keep liquidity high (good for asset accumulators, banks, financials), tourism can benefit.  On the other hand, UK’s standard of living will fall, with less ability to spend and invest globally, travel, spend internally on infrastructure/health care/education/etc.  At best, it puts the UK in a holding pattern (while others move ahead economically and socially); at worst it works out to years of relative decline.

It will be interesting days ahead.  The longer term implications will take some time to feel out.