Brexit was good for the UK and Europe will have to quickly find mutually beneficial trading agreements to boost a fragile European economy.
Brexit has long been painted as the dark evil but my view that the UK would leave was right, and I was emailed by a colleague at IBM, wondering how I could be so right this time following our coffee discussions a few months earlier.
The point I am making is that the UK and many other nations are fed-up having someone else in the mid of Europe deciding critical policies, and regulations, and also threatening the important British financial industry with noncompetitive tax laws. And with a very bureaucratic EU where all member states often have to agree on decisions, its understandable nations of higher standard soon want to leave.
Accordingly, several developed nations are fed-up feeding other poorer states in the EU, but I am not blaming the poorer nations - instead there is a lack of the common good for the entire EU! The immigration crisis has been a disaster and in my view the EU was never really a united concept, only on the paper, but not in the reality. With two brutal world-wars starting in Europe, the world said never again but so it happened again with mass murder – in the former Yugoslavia.
For people working in the EU, and in a company that employs people of various nationalities, you can often see the division of for instance the French, British, and German peers, by not spending very much time with each other which just reminds you of the inner fragility of the EU. And how about the collapsing euro, doubled unemployment compared with the USA, and a very late QE quantitative easing program by ECB to stimulate a very slow growing European economy?
Another interesting point is that many reporters, analysts and stay-in the EU campaigners are now turning to a “stay-out” mentality, understanding that the British economy will move on and a catastrophe was not the aftermath, and will likely not happen. And with a UK having a wealth of experience ruling almost 40% of the world’s population, they Britons learned one thing and another of how to function in difficult times, haven’t they?
Fear and market greed has likely controlled extreme volatility of currencies and the stock market just after the Brexit, but now seems to stabilise. With a FTSE 100 having recently rebounded to a 11-month high and the FTSE250 recovered half it losses the Brexit does not seem to have had a catastrophic impact on the capital markets.
If the outlook of the British economy continue to become darker, with a pre-Brexit PMI index showing the weakest activity since 2013, Bank of England is likely to cut interest rates or restart QE which would mean more money going into assets with an upcoming peak in the FTSE index followed by an enhanced GBP.
What I see as a higher risk would be if Scotland with its natural resources leaves the UK, to remain in the EU that would likely hurt the UK, with the possibility for financial firms of moving to Edinburgh or Dublin, to benefit the access to the single market and monetary union. But is this such a disaster? How about Norway, Swiss, they seems to be doing fairly well by being outside the EU but with special trading agreements.
The UK should in my opinion develop special tax advantages for corporations to invest in the UK, as well as, putting efforts to become a competitive offshore IT and financial empire, still benefiting from the language, time-zone and strong cultural ties with the USA. The UK may also seek at developing special trade agreements with China, Japan, India, and North America, to further boost the economy.
Deutsche bank has further stated that “A devaluation of the pound can provide a near-term boost to exports and, unless reversed, offset to some extent the tariff/friction costs to exports. It’ll also discourage imports, though, which will neutralize the effect on exports to the extent that they embody imported intermediate goods – the OECD estimates that in 2011 22.9% of the gross value of UK exports was foreign content – and lead to a reduction in imports of consumer goods. With the UK running a current account deficit of 5.6% of GDP last year, the highest since at least 1955, a depreciation of the pound seems desirable anyway”.
The global growth for the year ahead will experience a modest negative impacts of the Brexit, but where uncertainty of the aftermath of the Brexit still weigh on private investments and consumption. And with a possible policy easing by BoE - Bank of England and a plunge of the sterling this would ease the blow as well.
The UK is vital to the economy of the EU, and with an ECB bank chief battling with lowered interest rates and less successful QE program showing modest growth of GDP, I don’t believe that the EU wouldn’t develop special trading agreements with the UK to avoid further economic downside in the EU. What could happen with the Brexit is however, that populists in the EU gets further power, and this would be a market risk to consider in the near future.
The EU banks are also in crisis, with slow growth, low rates, regulatory tightening which also supports the fact that the EU should have an interest for a quick and mutual special trading deal with the UK as soon as possible.
A quick look at investing.com and the UK, USA, Germany, Japan, with data such as PMI, NFP, CPI, Retail Sales, and sentiment index mostly shows positive figures comparing with forecasts and previous months data. Let’s see upcoming data releases and let us look forward starting to trade S&P500 and DAX again in September.
What is your view of the Brexit and how do you plan to swing trade the capital market autumn 2016?