Of course the truth is we are not really yet ‘after Brexit’ as the process of disengaging – the dreaded Article 50 – will take some time. According to the Prime Minister’s statement on Friday, this process – the triggering of Article 50 – will not even begin until October. Presumably, there will be informal negotiations before then, but in terms of who will be leading them and what will be their motivation, we are somewhat in the dark. Is it better to have a negotiator who is a fervent Brexiteer who may however find it difficult to be diplomatic with the EU (and may be slightly unclear about what they actually want) or a more sympathetic Remainer who doesn’t believe in what they are doing?
Investment markets hate shocks and boy did they get one on Friday. Returning from a very happy celebration of my daughter’s graduation in St. Andrews I checked the news at 11pm on Thursday evening. The pound was at 1.50 to the US dollar and the odds of a Leave victory had drifted out to 6/1 against. So the outcome which became apparent during the night caused a particularly dramatic immediate reaction. The pound collapsed soon after the early results came in and when stockmarkets opened at 8.00am – followed very soon by the PM’s resignation – the FTSE 100 was down 8% and the more UK focused FTSE 250 nearly 12%.
Should investors take comfort from the recovery during the day? The FTSE 100 finished Friday only down 3.2% – the FTSE 250 a more punishing 7.2%. The pound was at $1.363 and Euro 1.226. The yield on ten year Gilts fell to 1.22%. Was this stockmarket recovery the result of jubilant Brexiteers picking up perceived bargains; the calming words of the ultra smooth Mr. Carney (Carney had spoken soon after the PM’s resignation, saying the BOE stood prepared with £250bn of liquidity) or simply the thought that the market had overreacted and that actually not much would change in the short term.
Probably some combination of all three. Of course there was also the element that the more international stocks would get a boost to profitability from the weakness of the pound. The best performers from the FTSE 100 were those stocks which were both defensive and which had a large proportion of non UK revenue. So Glaxo was up 3.7% and BATS 2.6%; the biggest casualties, as we had predicted (with no great foresight!) in our piece on 30.05.16 were the banks; Barclays, initially down 35% finished down a mere 18%, with Lloyds falling 21%. Insurers (Legal & General down 20%) and general financials suffered pretty drastically as well. Having said that domestically focused stocks such as ITV, down 20%, also suffered, as of course did easyJet; property companies as well. However the miners (gold was clearly strong) and oils were relatively unscathed, helping to support the overall index performance.
But it was in the FTSE 250 and particularly housebuilders (as we had also predicted) where the most carnage was felt. Barratt Developments fell 24% and Bellway 23%, for example. Is this overdone – probably. Could we have another global recession as a result of the hit to still fragile business confidence – possibly. So the £250bn question is whether this is a buying opportunity or whether one is better waiting on the sidelines.
We may be (almost certainly are) prejudiced in this but it does seem to us that for there to be a better than pretty dreadful economic outcome, our political leaders need to show a maturity and sensitivity that has not often been evident. It is true that nothing very much will happen in the short term; but that in itself will be debilitating because business and investors will not know where the UK really wants to be. Political risk has been significantly heightened for investors in UK assets. We would, therefore, remain very cautious over the short term. There is of course the risk that this increased UK political risk is joined by concerns around the US election; this is unlikely to be a good climate for investors.
So we don’t think that now is a good time to snap up bargains. Cash may be the best option. As a final personal aside – this is nothing to do with investment analysis – I think what this country needs now is a deal maker. Why does it have to be All or Nothing (the Small Faces). Why not have a discussion with EU leaders along the lines of: okay, the British people seem to object to the numbers of people coming in. So, give us a moratorium for 5-7 years on free movement of people (we would have a temporary status outside the EU to conform with the Referendum) and we would have time to spend the money on infrastructure to cope with our increased population; there would be a firm commitment to spend on housing etc. which would benefit demand throughout the EU and we would retain access to the single market. And perhaps we would pay a bit more for this privileged position. And at the end of the period there would be a commitment to another referendum. Strike a deal? Everyone happy? What a shame there is no chance.