Fear not the Brexit

Financial Mirror (Cyprus) - - FRONT PAGE -

The UK political class is all in a flut­ter as the lat­est Euro­pean Union ref­er­en­dum polls show an ap­par­ent rising tide of sup­port for “Leave”. Hav­ing or­ches­trated the great and good into warn­ing of catas­tro­phe should a Brexit ma­te­ri­alise, it would seem that “project fear” is not cut­ting through. I tend to have strong political con­vic­tions and per­haps for this rea­son I have a lousy record of guessti­mat­ing elec­tion out­comes. Since the UK ref­er­en­dum de­bate started, I al­ways felt that the Brits would vote to leave, so no one would be more sur­prised if I was for once proven right.

The ques­tion for in­vestors is how much a Brexit would mat­ter. On the one hand bond yields are plumb­ing new lows, point­ing to fears of a loom­ing macro shock, yet the pound re­mains within its re­cent trad­ing range. I must ad­mit to hav­ing very lit­tle trep­i­da­tion be­yond the short term volatil­ity that would en­sue. My start­ing point is that I can­not re­mem­ber a sin­gle in­ci­dent of in­creased freedom be­ing fol­lowed by a sus­tained de­cline in liv­ing stan­dards—not one. And even ar­dent “re­main­ers” would be hard pressed to ar­gue that an exit from the reg­u­la­tory and non-demo­cratic EU monster would not boost eco­nomic freedom in the UK.

Of course the cen­tre­piece of the scare cam­paign run by the men of Davos is that a Brexit would re­sult in cap­i­tal flee­ing the UK, re­sult­ing in a col­lapse of the pound and gen­eral i mpov­er­ish­ment for the pop­u­la­tion. So, it is in­ter­est­ing to note that the pound is at about its pur­chas­ing power par­ity level ver­sus Ger­many, which im­plies that it is un­der­val­ued by about 5% against France and by al­most -10% ver­sus Spain and Italy. On the same ba­sis, ster­ling is un­der­val­ued by about -3% against the dol­lar. Hence, any de­cline in the pound from this level would make UK man­u­fac­tur­ers and ser­vice providers highly com­pet­i­tive. Car fac­to­ries in the Mid­lands would quickly start hum­ming to the swift detri­ment of Wolfs­burg and Mu­nich.

Run­ning a Lon­don-based money man­age­ment busi­ness op­er­ated through Dublin would be­come far more prof­itable, as would the in­surance in­dus­try. Both of th­ese sec­tors should do well from less in­tru­sive Bri­tish reg­u­la­tion com­pared to the Euro­pean ham­mer (and sickle). Con­se­quently, once the sit­u­a­tion sta­bilised af­ter an EU exit, cap­i­tal would quite quickly start flow­ing back into the UK.

So my advice is sim­ply to let the Fi­nan­cial Times- fol­low­ing crowd work them­selves up into a frenzy of pound­selling and should the re­sult be for an exit, fairly soon af­ter­ward move in to buy the cur­rency. As for UK eq­ui­ties, most of the big in­dex com­po­nents are banks, and com­mod­ity play­ers, which will be af­fected in only a lim­ited way by any change in Bri­tain’s re­la­tion­ship with Europe. HSBC, for ex­am­ple, earns about two thirds of its profit from Asia, with al­most 40% made in Hong Kong. The sit­u­a­tion would be quite dif­fer­ent for medium-sized UK com­pa­nies which will see an im­me­di­ate ben­e­fit from a cheaper pound so I would be a big buyer, just as I was in the af­ter­math of the UKs exit from Europe’s Ex­change Rate Mech­a­nism in 1992.

As for the bond mar­ket, I am ad­mit­tedly not thrilled by the cur­rent low level of yields, but if the pound be­comes cheap enough, in­vestors should cer­tainly sell bonds in the likes of Italy, Spain and France, and buy gilts.

All in all, I be­lieve that a vote for Brexit would be a great day for lib­erty and for free mar­kets, a bit like that achieved by Mar­garet Thatcher in the 1980s. I have no doubt that the 364 econ­o­mists who signed the let­ter to The Times in 1981 con­demn­ing her macroe­co­nomic poli­cies would have sided with “Re­main”. Two years af­ter that let­ter was sent, the mar­kets bot­tomed in April 1983 and UK eq­ui­ties en­tered a struc­tural boom.

To sum­marise,

if Brexit ma­te­ri­alises,

there will

be dis­lo­ca­tion, but it will of­fer an im­mense op­por­tu­nity for those will­ing to take risks and ex­tend the du­ra­tion of their views. The end of hor­ror is al­ways bet­ter than a hor­ror with­out end, runs the Ger­man say­ing, and it must be said that they are spe­cial­ists in this topic.

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