“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas A. Edison
I am going to put my cards on the table: I voted for the losing “remain” side in the U.K.’s European Union (EU) referendum last Thursday. I think it was about 3.30 a.m. London time on Friday morning when I realised a London surge was not going to save the day, and my prediction of a 52/48 split was almost precisely the wrong way round.
The world always carries on, and despite the ludicrous calls for a second referendum, Parliamentary blockages and other constitutional gossip now that a result has been established, the correct attitude is to concentrate on the opportunities emerging from this.
Most of us have seen the documents put together by the U.K. Treasury and other academic bodies highlighting various implications for economic growth rates in the U.K. after a Brexit vote. The methodology and assumptions used can be readily criticised, but most would agree that ripping up a trade agreement with a large economic partner always carries risks. Even just the fear of disruption can cloud consumer spending and business investment decisions. That’s why you hear the recession risk talks in the U.K.
Aside from the obvious pursuit of as many free trade-centric deals with as many countries as possible during the two year transitional period the U.K. has with its current EU agreement in place, the U.K. has to do a lot more to offset any post-Brexit impact. At first glance, Friday’s sharp downward shift in the value of the pound appears such a policy safety valve. You know the theory: depreciate your currency and boost your exports – and given the U.K.’s current high trade deficit position – such a move is just what the economic doctor ordered.
From an overvalued position, currency depreciation – as in Sterling’s White Wednesday September 1992 exit from the Exchange Rate Mechanism – makes a lot of sense. The pound is not particularly overvalued, however, and whilst there will clearly be some competitiveness boosts, reliance on a currency depreciation as a central part of an economic recovery plan is a policy tactic straight out of the 1960s or 1970s – and it did not do much good then.
No, the newly liberated U.K., which is looking to exit an EU which they believe is economically sclerotic, must go completely in the opposite direction. Not tariffs to protect domestic industries, nor restrictions on skilled citizens from other parts of the globe who can add value for the overall country, or a burden of red tape that entangles business in a burden of regulation. In the global, dynamic markets of the 21st century, the U.K. must adopt a mindset that encompasses the entrepreneurial zeal of East Asia and the laissez-faire can-do-ism of the United States mixed up with our own style and global outlook.
In short, it needs a supply side revolution not seen in this country since the 1980s.
Here’s the irony. Much of what I have written in the above paragraph I would have also written in the event of a “remain” victory. You see some matters are much bigger than just a simple binary vote. Now the question is after all the campaign rhetoric, key issues and promises, are the policymakers going to step up or not?
The EU referendum result is just the end of a beginning. The next phase is not remaking the U.K. in the style of some previous halcyon period but in making sure the U.K. – and all of its citizens – are fully-fledged global players over the balance of the 21st century. The challenge will be achieving this against a backdrop of lower economic growth, an evolution of the political top guard and Brexit campaign promises that have been made.
And to put it in the terminology of Thomas Edison’s quote cited above, it is going to be harder work than under the previous prevailing economic and political status quo.
Chris Bailey has just under 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.
Chris founded Financial Orbit Limited in 2013 and his daily macroeconomic comment and securities analysis with relevance for global investors can be accessed via his Financial Orbit Macro, Financial Orbit Stocks and Financial Orbit Immediate publications, selected summaries of which are posted at www.financialorbit.com as well as his twitter feed. Additionally, Chris undertakes bespoke research and consulting work for a number of global asset management firms on both market strategy as well as global securities analysis. You can reach him on Twitter @Financial_Orbit.
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