Brexit – I can’t hear it anymore
So the unthinkable happened. The British electorate was wrongfully given the opportunity to express its opinion democratically. The remainder of the EU should never allow a referendum on EU membership anymore as the electorate is not objective in contemplating on such decision, said a renowned French political commentator on TV the evening of the British referendum. What a blatant contempt and disenfranchisement of the European electorate. Can one still be surprised about the electorate’s skepticism towards this construct?
Former Prime Minister David Cameron, who probably tried to blackmail the EU into granting special concessions to Britain, eventually could not go back on his threat of a referendum which he probably was quite convinced, would go his way. He had no choice but to resign after this serious misjudgment of the attitude of his electorate towards the EU. As every coin has two sides the Brexit also has two sides and for anyone to pretend to understand exactly which side economically is the better one for Britain is preposterous. At the end of the day it was a decision between regaining and giving up political autonomy. The pride of the Brits evidently prevailed against the wishes of the whole political establishment of the EU the US and whoever else thought it opportune to try and influence the British voter from outside.
The EU is a political construct as was acknowledged by many renowned politicians before so its intention was never to deliver economic benefits and all the arguments based on economic considerations were misleading from the start. Britain now needs to be consequent and execute its regained political autonomy by capitalizing on the opportunities that are created by the EU’s systemic weakness and flawed decisions such as for example filling the void the EU created on the Russian market. Britain should now be much more flexible, can act much more swiftly and offer more consistent policies in its interests than the EU will be able to. At the end of the day an economy must be supported by a strong political will, in which regard Britain will certainly be able to offer a lot more than a politically fragmented EU, and that is unlikely to change for many decades to come. Germany as the strongest economy in the EU does not have the political backbone to lead the EU while France as politically probably the strongest force does not have the economic backbone to lead the EU unlike Britain that could well have played that role.
So what is the implication of Brexit for the pension fund member and investors? Well firstly, do not look at your investments for the next week or so. Markets are currently distorted in our opinion, by unfounded panic and fear. Any economic effects will really only be discernible over the next 2 to 5 years. Britain was one of the countries with an above average wealth in the EU. This implied that its wealth would have been further and further diluted towards the average within the EU umbrella. Britain will continue to use its Pound as it has hitherto – no change in this regard. Coming into Britain as a European may imply you will have to go through immigration control – but what really is the difference with Europe where the threat of terrorism has de facto re-introduced immigration controls? British tax laws and other trade related legislation will be as well aligned with those of the EU as they currently are and can be even better aligned if necessary, so the Brexit should present no impediment in this regard. Once the EU has managed to establish a single statutory, monetary and fiscal environment, there is nothing preventing Britain to adapt its own environment if this is in its interests. Britain should effectively be able to offer the best of both worlds now. A break-up of the EU would of course create a totally different scenario. It seems to be a great opportunity right now to capitalise on the week Pound and invest in Britain.
We do not believe that the Brexit will impact on the global economy once markets have digested the new reality. It may well cause shifts in the global economy, probably many in favour of Britain at least in the medium to long term. We would therefore now rather bet on Britain in terms of investment than on the EU and do this in the short to medium term when opportunities of under-valued assets will no doubt arise as the shifts will occur and until they have been digested by the British economy.
The global economy of course has not changed and remains in the doldrums. The US Fed will not raise interest rates further at this stage as its policy measures have failed to establish a sustained growth trend in the economy. This problem of cause was exacerbated by the steep drop in the oil price that has taken a lot of steam out of the fracking industry, and other related industries and has put a cap on job creation that was well on its way. For the same reasons we once believed that the steep incline in the world crude prize was irrational we believe that the steep decline is as irrational and probably politically motivated. The motivation seems to be in forcing countries that refused to subordinate themselves into submission, e.g. Russia, Iran, Venezuela etc. So far this strategy has borne some results but not without a significant measure of self-mutilation. It would seem that the best accelerator to global growth is an increase in the prize of crude to sustainable levels once again. This should certainly accelerate the velocity of money flows. However, it is likely the political objectives behind the sharp oil price deceleration have not been achieved and hence we and the global economy cannot yet look forward to the ‘throttle’ being opened again. Any indication of deflation is likely to also change views as governments will find it very hard to deal with a deflationary environment. This means the global economy will remain sluggish but who knows maybe an outsider for US president and a Britain outside the EU may bring about some global political changes?
In view of our expectation of a continued sluggishness of the global economy, yield will be hard to get by. The basic principles are to spread risk and to look for value in assets that generate high yields. Focus on achieving real returns of inflation plus 4% to 5%, i.e. be content with returns of between 10% and 12% for the next 12 months.
Download the complete Benchtest fund investment overview at http://www.rfsol.com.na/benchmark