Brexit: Now For The Hangover

Brexit: Now For The Hangover

In a historic vote, the UK electorate has voted to leave the European Union (EU). What will an exit from the EU mean?

Seven Investment Management (7iM) is a leading authority on investment management and financial markets both at home and abroad. As a close ally of the UK flexible workspace industry (delegates of this year's BCA Conference will remember Justin Urquhart-Stewart's keynote presentation), the BCA immediately reached out to 7iM in the wake of the EU Referendum result.

Here, 7iM Chief Investment Officer Chris Darbyshire shares their Market Bulletin and Portfolio Update commentaries. The BCA has provided a summary of the updates below, and will share any further news as soon as it becomes available.

At this stage it is clear that UK business owners and flexible workspace operators have more questions than answers. Does leaving the EU entail more risks for Britain than opportunities? In Darbyshire's words, "We are about to find out."

Brexit: Now For The Hangover
BCA Summary of Market Bulletin by Chris Darbyshire, Chief Investment Officer at 7iM

Chris Darbyshire, 7iMFull Bulletin available here

What's already clear is that the risks will be priced very quickly, whereas the opportunities remain in the distant future.

Brexit was a shock - while most thought the vote would be close, I had not come across one serious political analyst or academic expert who thought Brexit would actually succeed.

Our portfolios have remained relatively stable, their foreign assets benefiting from the weakness of the Pound. The gains on foreign currencies have, so far, more than offset the losses on underlying assets. The benefits of an internationally diversified portfolio are most powerful when the home currency is in the eye of the storm.

Brexit shock may take some time to ripple through the financial system. Quite apart from the resignation of the Prime Minister, and the possibility of Scottish secession from the Union, the fact that Brexit entails a lengthy exit-negotiation with the EU means an awkward limbo for Britain and financial markets.

During this period investors will begin to reconsider Britain as a stand-alone state, without full access to the world’s biggest economic bloc. Given the initial response of capital markets, investors are likely to see the threats more than the opportunities.

Put simply, Britain imports far more than it exports. As the Pound continues to fluctuate, imports will cost more, leading to inflation. Inflation can be combated by higher interest rates but, with our economy uniquely sensitive to interest rates via variable-rate mortgages, higher rates would hurt home-owners and slow economic growth. An economic slowdown would lead to an increase in government deficits.

It’s possible that Britain could find substitutes for those imports from among its own producers and manufacturers. Ideally, Brexit would prompt a surge of domestic productivity, innovation and entrepreneurialism. But the timing of the Brexit process is against us. That surge of productivity might have to take place against a potentially difficult economic environment, the kind that deters entrepreneurs.

Senior figures in the European establishment want to make an example of Britain as a deterrent to other potential leavers. They want a tough deal, done quickly. This would be the wrong approach. The EU should seek to defuse the populist surge by acknowledging its democratic deficit. Certain issues (immigration being one) should be decided at a national level. Better for the EU to address that reality, devolve power

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