BREXIT – it’s all going to be fine…

Shhhh, I want to tell you something

As the good news continues to flow, the pro-BREXIT campaigners seem more vitriolic with each passing day (especially in dailies such as the Express, Mail and Telegraph).

Perhaps they have the right to be. In this blog I want to explore BREXIT and look behind the headlines.

Politics

BREXIT ripped apart three major political parties.

This might sound controversial but Cameron and Osborne took on a country in a pitiful state, and had started to rebuild the economy. They achieved much but there was no doubt that a gap was growing between the haves and have nots which was ultimately their downfall. What followed took many by surprise; the collapse of a government, swiftly followed by a complete replacement. This was seen by the markets as positive, because at the time it looked like there would be months of political uncertainty.

Much of what Jeremy Corbyn says makes sense, however his dogged determination to remain in power may be his eventual undoing. He has his supporters and has won the leadership challenge but there is no doubt he has divided his party, and shown a side to him that many will be uncomfortable with. This ultimately leaves them a weak and ineffective opposition. Time will tell the eventual outcome.

The Liberal Democrats were perhaps unfairly punished in the 2015 election but since then under their new leadership they have sunk deeper into the wilderness. Although they claim to be the party of opposition, most people would struggle to name its leader, where it stood in the referendum and its future direction. Here is a pub quiz question, who is their leader?!

In summary, the resignation of Cameron and the subsequently shorter than expected leadership race without a snap election has brought stability, and this is positive. However, a lack of credible opposition that can hold the government accountable is a worry and something to watch over the coming months and years.

Interest rates

Interest rates were cut in August to 0.25% in a bid to boost the UK economy. There is the potential for this to come down further and for rates to remain around this level for the next 5 to 10 years. Furthermore, the Bank of England put in place a £100bn scheme to force banks to pass on low interest rates to households and businesses.

This move is an effective tax cut for many and can be positive for the economy. Signs are that this is having the desired impact.

There are however downsides to this; many are worried that growing debt encouraged by low rates for borrowing is storing up a problem for the future. Cash as a savings vehicle is no longer viable and for those who have a guaranteed pension scheme the deficits are growing due to falling bond yields.

In summary, the cut in interest rates in the short term has been beneficial, but there are long term consequences for which the outcome is unknown.

Currency

The “collapse” in the currency has been another positive for the economy.

For exporters, UK products look cheaper and this is good news for our economy. Another side is investment in the UK; we have already seen overseas companies investing because they are getting a discount on their investment. Tourism also increases as the UK becomes an attractive place to visit, which will help to further bolster our economy.

However, there is a flip side to this. Foreign holidays become more expensive which will really start to bite in 2017; this may then be positive for the UK, where people switch from their foreign trips to ‘staycations’ here.

Imports have become expensive as the UK imports more than it exports. Watch out for food manufacturers and supermarkets introducing smaller products at the same price as the previous larger versions!

In summary, a weaker a sterling has been positive for the economy with the potential to increase exports and foreign investment. However, people will feel its impact when traveling in years to come and more expensive imports will affect prices in the long run.

House prices

It seemed that the UK was close to a housing bubble similar to 1988/1989, based on the assumption that interest rates would rise, a strong sterling and the end of the Buy to Let rush. This indicated that the housing market would start to slow and possibly we would start to see a fall in house prices. Initially when the vote to leave happened there was evidence that some house sales collapsed altogether, and others only proceeded where a large reduction on the purchase price was agreed.

However, there is evidence that the market has steadied. Lower interest rates will make purchasing a property attractive but new affordability checks will be a hurdle for first time buyers. Buy to let remains less attractive due to recent tax changes, but with a weaker sterling property remains attractive to foreign investors.

In summary, house prices are mixed, there is a slowdown but it seems for now we have avoided a 1988/89 crisis. The question is whether people are confident in the market in these new conditions; only time will tell.

Jobs

This is very mixed. Japan’s Softbank has purchased ARM Holdings and looking to double the workforce in five years, GlaxoSmithKline is investing £275m in the UK and McDonald’s is creating 5,000 new jobs.

Unemployment continues to fall and so there is little evidence of any impact at this stage. However, research shows that permanent hiring dropped to levels not seen since 2009 with employers also freezing recruitment. Additionally, concerns have been raised in the financial services sector with Morgan Stanley and BlackRock indicating they are considering whether to invest further in the UK. The financial services sector contributes significantly to the UK economy so this is something to watch.

In summary, there is little difference at this stage. If unemployment starts to rise, then this will have an effect on the economy, however you could argue that at some point it would rise whether BREXIT happened or not.

Immigration

Big argument during the campaign but is it good or bad?

The arguments against high immigration include the effect on wages, as it has been suggested that immigrants force down average wages because of cheap labour. The Bank of England indicates that there may be immigrants a “small negative impact” but this applies to all immigration (both EU and Non EU).

Another argument is that many are here to only claim benefits. According to research from University College London since 2000, EU immigrants as a whole have contributed net £15bn to the public purse and non-EU immigrants £5bn. According to the same report immigrants are 43% less likely than UK-born citizens to claim benefits or tax credits and are 7% less likely to live in social housing. The reality is that many people who come to the UK do so to work.

This is an important part of BREXIT and the outcome is far from certain. Immigration is good for our economy. We have an aging population (median age now around 40). This means more people are retiring, meaning fewer people earning, paying taxes and fewer people of working age. Many immigrants coming to the UK are younger and are usually skilled people which we need to maintain economic growth. They take jobs where there are currently shortages of labour and ironically they save us money too. Many have been educated in their home countries and it is estimated that between 2000 and 2011 this has saved us £6.8bn. Taking it back to 1995 the saving is £49bn!

According to the left-wing think-tank Class if we cut migration to tens of thousands rather than hundreds of thousands, GDP would fall by 11% – hitting jobs, the economy, pensions and cost of living and we would need to raise income tax by 2.2% to make-up the shortfall.

In summary, this isn’t being talked about but the eventual outcome could have a serious impact on the UK economy if we try to stop or cut immigrants coming to the UK.

Trade deals

The aim of trade deals is simply to boost economic activity by reducing or even removing barriers to trade across international borders.

Some may argue being part of a block of countries (like the EU) makes it easier to get deals. But the EU has never had a trade deal with the US (some people think this will never happen); and yet EU countries trade with the US without this.

Of the course, the EU does have trade agreements in place and the UK could be set adrift but this is a little more complex and it is worth considering two things; the EU is a major trading partner of the UK and in reality they will not want to block this. They also have an additional challenge. The EU has negotiated a range of preferential trade agreements with other countries like South Korea, with the UK as part of that trade block. In theory if we leave then countries such as South Korea could ask for these to be revisited on the basis of a ‘shrinking’ market on what was originally agreed. This means that any agreement the UK makes with the EU may have to include countries outside the EU to protect existing deals, and therefore might limit what the UK can do.

In summary, trade deals are extremely complex and people will talk with an air of knowledge. The reality is that we really cannot know yet impact of what we will agree. However, we are in a global market and businesses will always find ways to trade.

Economy

There were concerns about the UK economy after the BREXIT vote. Often we assume that the FTSE 100 is a barometer of how well the economy is doing (I am personally not convinced by this!). The index effectively collapsed on the day of the vote but has since broken through the 6,900 barrier.

We shouldn’t underestimate the impact of falling interest rates and a quick change in government. None of this was predicted by either side and has actually brought in stability. A weaker sterling has also benefited the economy, and so when you put all of this together the outlook in the short term doesn’t seem that bad.

In fact, there are strong arguments that assuming the UK pushes forward in 2017 and then leaves in 2019 the UK could see a really positive changes in the economy for at least three years. This is because whilst sterling is weak the UK is an attractive place to invest. Companies will still want to trade with the UK and from a consumer side lower interest rates are like a tax cut; and therefore we have more money in our pockets.

The press who were pro-BREXIT will point to this but the fact was that events which weren’t considered actually occurred and this has been a benefit to the UK. It is telling that small and medium sized businesses are more pessimistic about the future. This is because although they can see the benefits in the short term, the long term still remains uncertain.

In summary, the UK economy is likely to continue to be positive over the next 2 to 3 years but beyond that no-one knows what the future holds. The pessimism shown by some perfectly reflects how we should feel moving forward.

And finally the press

Without a shadow of a doubt the press had considerable influence on the way people voted – the main papers who wanted BREXIT were the Telegraph, Mail and Express. If we ever thought the press was unbiased BREXIT blew that away!

It also showed that if we thought the power of the press had weakened, this is clearly not the case. The press remains a powerful force over people and the decisions they make. If I was paid £1 for every time someone said something was true because the Daily Mail said it, I would be a millionaire!

The point is that if we have learnt anything from BREXIT, it would be to not believe everything we read in the press. They will write stories to pursue their own agenda. There are plenty of blogs and other sources out there that provide the facts and that is where we should turn.

In conclusion

Shhhh, I want to tell you something:

BREXIT HASN’T HAPPENED!

There are things that happened post vote that in hindsight we could have predicted – a fall in interest rates, weaker sterling and a change in government! All of these factors have been massively positive for the UK. But BREXIT hasn’t happened yet – so there is still a lot of unchartered territory.

When I buy something from IKEA it comes with instructions on how to put it together and what it will look like when its finished. If I purchased it with no instructions and no idea on what it would like then I might start out all excited, but as I got more into it I would understand that without instructions and without a picture I would have no idea what the end product might look like. My mood might change from optimism to pessimism! Or a blind rage because IKEA furniture is a nightmare!!

And BREXIT is just that, we shouldn’t ignore the positives because it is very good news but there are big challenges:

  1. We can’t ignore immigration, we need it and it is positive for economy
  2. Not everyone wins with low interest rates, and importantly it stores problems for the future
  3. Currency, it is good for exports but we import more and this will feed through
  4. Employment is mixed
  5. Trade deals, a big question mark!!
  6. And of course Article 50 and what happens next

And we will likely add to this list.

In summary the BREXIT vote in the short term didn’t have the impact many thought. It has been really positive but remember the IKEA furniture. This is a project with no instructions and no picture of what it will look like. Done well we could have a beautiful piece of furniture, done badly it will be a mess. The reality is that it will be somewhere in the middle. How this plays out in the future is anybody’s guess so we just need to take care not to be sucked in by the press and if anything, perhaps adopt an air of pessimism (or certainly cynicism!)

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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