Brexit one year on
An excellent article by Tjibbe Hoekstra in Portfolio Adviser on 23rd June 2017 outlines that it has been exactly a year since the UK electorate voted for Brexit and made what one British fund manager recently termed, “a huge strategic error of the like the country hasn’t experienced in maybe a century”.
Chances are of course that Brexit won’t turn out to be as bad a misjudgement as UK Prime Minister Neville Chamberlain’s ‘Peace for our time’ claim upon his return from the 1938 Munich peace conference. But only time will tell.
What’s more obvious is that Brexit Britain is finding itself between a rock and a hard place now, exactly a year after it chose to leave the European Union.
The UK economy is slowing signs of serious deceleration, and Prime Minister Theresa May’s reckless election gamble has delivered the weakest British government in decades, at a time it is probably facing the most complex and politically delicate task a British government has ever encountered.
In the aftermath of the Brexit vote, sterling plunged some 15% against both the dollar and the euro, and the currency hasn’t recovered since. Bank of England Governor Mark Carney, who warned against the adverse economic consequences of Brexit before the referendum vote, responded to the Brexit vote by cutting interest rates, deemed by many Brexiteers as an overly pessimistic move at the time.
But economic performance, while initially holding up surprisingly well, has deteriorated significantly over the past few months. Foreign investment has plummeted and retail sales and business confidence have taken a hit. Rising inflation in combination with stagnant wages means a squeeze on living standards.
GDP growth is still positive, partly thanks to the weak pound, but it is slowing (to 0.2% in Q1 2017). A stagflation scenario, with real growth slowing as inflation is rising, is now fast becoming reality, making Carney’s move to cut interest rates now look prescient rather than inappropriate.
It must be noted, however, that financial markets haven’t responded as badly to the EU referendum as many expected. Though markets were pricing in a Remain outcome ahead of the vote, sterling has been the only asset that has really been affected so far.
UK equities avoided a sell-off partly because of their large exposure to foreign markets, but longer-term they may also feel the consequences of Brexit. Lombard Odier IM, for example, has created a Eurozone-only version of its European equity fund, following demand from clients.
“We have created a Eurozone ex-UK share class alongside our original pan-European equity fund. Some of our French pension fund clients no longer want UK exposure because of Brexit,” he says.
Brexit negotiations only started last Monday, and it’s still far too early to tell what Brexit will really look like. European Council president Donald Tusk even suggested there is still room for the UK to reconsider its decision to leave the EU.
“Much will depend on how the negotiations progress over the next two years, and it remains too early to speculate on what the impact might be in financial markets,” said Jim Leaviss, head of retail fixed income at M&G.
“The fall of the pound in the aftermath of the hung parliament vote [on 8 June] was relatively modest (less than 2% against its major trading partners), suggesting that some expect the election result to produce a ‘softer’ version of Brexit.”
The prospects of a softer Brexit may have increased following the UK’s inconclusive election result, with Theresa May’s mantra of ‘no deal is better than a bad deal’ having quietly been dropped by the UK government. But so has the uncertainty about the Brexit process.
“In what was always going to be a messy and difficult negotiation, May’s defeat while trying to strengthen her Conservative majority has further weakened her bargaining position,” said Philippe Waechter, chief economist at the Paris-based asset manager Natixis GAM.
“As such, while a clean break – ‘hard Brexit’ – looked like an obvious outcome, the range of possible outcomes has now widened. A year after the vote, the economic uncertainties of Brexit have grown larger, not smaller,” he added.
Are there no positive aspects to leaving the EU at all then? There is one, says Waechter. “The sole positive effect of Brexit is that it has been perceived by other EU countries as an example of what mustn’t be done.”
Is there really no silver lining? Well, while sterling’s fall has made UK consumers poorer, it has made British companies more competitive. The country’s trade deficit has narrowed significantly since the Brexit vote. According to Her Majesty’s Revenue & Customs, British exports increased by 7.8% y-o-y to £26.5bn (€30.1bn) in April, while imports decreased by 5.5% to £38.3bn during the same month.
However, if Brexit results in higher trade barriers with the UK’s European trading partners, these gains may well be reversed. In that light, Chancellor Philip Hammond’s call in a recent high-profile speech to “prioritise protecting jobs, protecting economic growth and protecting prosperity” in Brexit talks it is probably a positive development for the UK economy.
Clients talking to us presently remain concerned about the effects of Brexit on their final salary pensions particularly those who are relocating to Spain, Portugal, and France.
If you would welcome an independent overview of your final salary pension options then please contact us for a free review/discussion.
International Pension Transfer Consultants Limited
29 Windsor Place, Dublin 2, Ireland
Tel 00353 1 6815293 www.europeanpensions.ie