JASON HOLLANDS
Barely a day goes by without another dollop of doom laden warnings about the risks and “uncertainty” around Brexit, the latest of which was dished up this week by the International Monetary Fund.
While this is undoubtedly manna from heaven for Downing Street, which has been accused of orchestrating a drip-drip process of dire warnings about the consequence of Brexit from business leaders, the reality is that economists have a very patchy record of forecasting growth rates on a steady basis – let alone in a situation like this with so many yet unknown parameters.
There are of course so many potential moving parts around the terms of a possible disengagement that some of the more bold claims being made about the impact of Brexit from both sides of the argument should be treated with a very high degree of scepticism.
Whether Brexit is good, bad or neutral for the UK economy over the longer term is complicated melting pot of considerations that involves the cost savings from contributions (a net contribution last year of £7.1 billion once subsidies and grants are shaved off our £13 billion contribution), the trade impacts (difficult to quantify ahead of knowing the terms of a trade agreement), the economic impacts over changes to immigration and the adjustment costs for companies that do business across Europe versus a potential reduction in red tape for small, domestic firms. Small changes in assumptions across this array of factors, can create wildly different outcomes.
What we can safely assume, is that Brexit would provide plenty of lucrative work for lawyers.
So despite all the rhetoric and tomes of analysis from economists at City firms on this topic who are obligated to say something, what we are really left with is that the uncertainty of this debate itself is causing disruption at a time when there are many other thing to worry about, such as the slowdown in China, the weak outlook for global growth, terrorism fears and a migration crisis in Europe.
For investors, this uncertainty is being primarily played out in the currency markets, with Sterling having already weakened against the Euro. The Government’s controversial £9 million leaflet in support of the Remain campaign darkly warns that “If the UK voted to leave economic shock would put the pressure on the value of the pound”.
While that’s unwelcome news for anyone planning to book a summer holiday in Tuscany or a ski holiday in France, the reality is that there are also benefits to a weak Pound, which would make British exports more competitive internationally. In fact central banks around the globe have been implementing money supply policies aimed at achieving such a thing.
The impact of Brexit on the UK stock market is a lot less clear as this is not very representative of the UK domestic economy, but an international market dominated by large multi-national firms. In fact over two-thirds of the earnings of the FTSE 100 are derived overseas, principally in US dollars.
So while some investors may be getting petrified about holding UK equities on the back of Brexit hysteria, weakness in sterling could actually provide a temporary boost to corporate earnings, dividends and share buy backs as revenues earned in Dollars and Euros are translated back into sterling.
That could ironically be helpful at a time when underlying dividend growth is weak.
As always, the sensible approach for long-term investors is to be well diversified.
Brexit is undoubtedly a big deal, that could reshape the political landscape not just in the UK but Europe, but in an investment context it is the latest in a series of 'uncertainties' that have dogged markets in 2016 that have ricocheted from the slowdown in China to the health of Europe’s banks and the credibility of central banks following moves to negative interest rates. Before long the spotlight will undoubtedly fall on the US presidential elections as the next item on the 'wall of worry'.
Jason Hollands is managing director, Tilney Bestinvest
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