Brexit is not the beginning of the end for the UK

First, consider the reasons behind Brexit. The fact is that the British public voted against the ‘advice’ of experts, which reflects either a total lack of regard for the economic consequences of leaving the EU, or an attitude whereby they have had enough, and feel so unhappy with ’their ‘lot’, that they just don’t care. To which, it is clearly a concern that only about 19% of 18-24 year olds supported Brexit, whereas a whopping 59% of pensioners (who all came of age before the EU) voted to leave. The British are not alone - we live in a world where the people are far more willing to challenge political and economic order, and where this is clearly tolerated, despite the consequences. This populist discontent is growing – hot on the heels of Brexit, officials from France, the Netherlands, Austria and Scotland were also calling for independence referendums. The point being that, whilst there remains uncertainty in the UK as to how the exit will take place, there  appears to be more uncertainty in Europe as to what the EU looks like going forward and who may be next to leave?

Second, consider the consequences. For the UK there are positives, and we only need to look back at 1992 – the year that the UK made its exit from the ERM – to see how favourably things may play out. Back in 1992, in the wake of the UK exit, the GBP fell, interest rates were cut and rather than bring forth a recession, the weaker currency ENHANCED the UK’s competitiveness contributing to a strong GDP recovery and consequent surge in the FTSE. Back then, of course, the UK economy was in far weaker shape than it is now – today, employment stands at 34.3m compared to 27.6m in 1992 and the economy is now far more service oriented where things still remain strong with the current index of services at 110 - the services sector having grown at an annual real growth rate of 2.7% since 1997. In addition, the recent spike in UK Gilt prices could be seen as reassuring, rather than of concern – surely you wouldn’t buy sovereign paper if concerned with the fundamentals of the UK economy? The point being that the UK has the potential to move on from this issue having been through something similar before.

From the European perspective, there really isn’t any precedent and the strengthening populist movement continues to threaten EU stability. In addition, the central European market pillar of banks, are un-investible in the short term as concerns over capital positions and sustainability of dividends intensify.

A final – and perhaps unconsidered – consequence, is the Chinese reaction to capital flight back to the USD, and here the precedent is one of global market instability. There is little doubt that post Brexit, the fed is now on hold, which makes USD strength difficult to suppress and inflation – in the wake of QE – a greater concern.  The risk of a substantial Chinese devaluation increases volatility across risk assets and we cannot rule out sharp corrections as seen in Aug 2015 and Jan 2016.