This will (I promise) be the last of the BREXIT related articles for a time. The one area we haven’t covered and which we’ve been asked about is, ok, so what happens now?
With the proviso that what I’m going to write is going to be somewhere between a bit and a lot wrong in many regards, these are our thoughts.
It’s hard to see why the pound won’t continue to fall against most other currencies.
The UK economic numbers are likely to deteriorate. There’s a ton of uncertainty around how the EU negotiations will go and this will drag on and on. In normal times the BOE would put up interest rates to defend the currency, but almost certainly can’t as the economy is so potentially weak that higher interest rates would only make things worse.
There has been a profound divergence in performance between the multi-national foreign currency earning companies (BP, GLAXO, UNILEVER etc) which have risen strongly, and the domestic focused companies in financial services, house building, commercial property which have plunged.
The index overall has risen since BREXIT but going forward if the environment becomes more positive, then the reverse of what’s just happened will play out. Defensives will go down as they’re expensive, and cyclicals will go up because their current price reflects the fear of big problems ahead.
UK mid/small caps
These have been generally hammered as they have less global exposure so the currency devaluation hasn’t mitigated profit fears.
It’s difficult to see why they fundamentally recover until there’s more clarity about future trading agreements/conditions but they have sold off a lot and good fund managers will find mispriced assets in this fearful environment.
To an extent the US is facing its own quasi BREXIT vote; does it want to go down the darker path of voting for the dissatisfaction candidate Trump, or basically for more of roughly the same which is the Clinton option.
The US economy is strong and improving albeit slowly. It has oil and gas reserves; it’s not going to war again any time soon and it has world leading innovative industries so barring ‘The Donald ‘ blowing it all up it looks to be pretty sorted.
We have no real clue because nobody does. They need the West; so beyond scoring political points and nicking intellectual property they will probably play reasonably nicely.
As far as their economy, debt, manufacturing and infrastructure spending goes only time will tell if this can be brought into balance.
This is a big one (apart from the UK) in terms of what happens next.
A fundamental issue with Europe is that it lacks labour flexibility apart from Germany which maintains a world class manufacturing based economy in an environment that should prevent this, but the majority of the continent is pretty expensive and moribund.
There are many great companies in Europe but the overarching dynamic innovation and insane commitment to reimagining is missing, unlike that which flourishes in the US and Far East.
Europe is a wonderful place to live but economically it’s old, tired, hamstrung by overbearing legislation and appears to have much lower energy and vibrancy.
What happens post BREXIT is the big political question to be answered.
Even those in the UK who wanted to stay were mostly not blind to the flaws of the European construct.
Being out is almost certainly not good but being in is not probably great either. Europe has a load of big issues to face and they’re very thorny.
Japan has recently gone down an economic snake as the Abe quiver appears bare of new arrows to keep firing up this challenged economy.
It has world class companies but massive issues of an ageing population and epic sovereign debts.
Quite why the Yen is seen as the ultimate safe haven currency is a mystery to us!
The rest of the region is really the story of a long runway of potential to grow.
It’s the opposite of Europe really; young, hungry, willing to work all the hours with a collective desire to achieve higher standards of living from a much lower base, which is great for consumption.
It’s going to be volatile but the trajectory is up.
Absolutely no idea?????
At some point they will go up again but when and from what price are the unknowables.
UK Commercial Property
This is an asset class which is headline news because of the ‘gating’ of property funds which we commented on in the last blog (illiquid assets don’t work in a supposedly liquid fund). The future performance will depend upon how the political and economic future of the UK plays out which is anyone’s guess currently.
These values may in retrospect look cheap or it may be only the beginning of the losses as bad news keeps coming.
Nobody can know which way it will turn so it’s a no-go investment for us.
This to us, is by far the most important medium-to-long-term investment concern.
The yields on investment grade bonds and sovereigns are now below inflation, and for some credits are actually negative.
This surely cannot be sustainable longer term. It looks to us like a bubble that continues inflating as events keep conspiring to prevent any concerted attempt to normalise.
The past is a useful map for the future but in this case there is no comparative past, everyone is seeing this for the first time and that means it’s all guess work.
I have been wrong for several years in positioning my own investments towards assets that will benefit from higher interest rates. We have equally positioned the portfolios away from fixed interest for the same reason and this has certainly recently cost performance.
As every occurrence causes more flight to bonds (depressing yields even lower) our conviction grows that this is going to end badly for those buying at anywhere near these levels.
It is an oft repeated joke by us that prophesying the end of the world is of no great use unless a time is also given, and this correlates to our bond warnings in that we don’t know when either. The overall distortion is so great it’s hard for us not to see it in biblical terms.
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.