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Brexit Investment View (Part 2)

This piece was written as part of our advice to clients immediately following the Brexit result, on Friday 24th June. Things have of course moved along rapidly since then, with the Exit campaign leadership all seemingly disappeared, leaving Theresa May to take over as the new British Prime Minister on Wednesday 13th July. The immediate reaction of the markets and the plunge in the value of the Pound were predictable enough, but then so too perhaps has been the subsequent recovery of both as the dust begins to settle. Despite that the content of this special Brexit investment report to clients remains largely valid. The Aisa Investment Committee convenes this week, and will issue an updated report as a result of that meeting, that will also be posted here.

 

As we wrote in our recent blog, the initial reaction is likely to be dictated by uncertainty and fear of the unknown. We are likely to hear extreme statements from many politicians as they too react emotionally to the result. Clearly, whatever happens to the UK is going to impact tremendously on our neighbours and we would hope that behind the rhetoric people in power with wise minds will understand that “cutting off your nose to spite your face” is unlikely to help anyone.

We believe the following two extreme outcomes could potentially affect the UK:

1. The UK will, despite all rhetoric, be offered an alternative deal that will allow us to operate on the periphery of the EU whilst not impacting on allowing the EU project to move forward, or
2. The EU will attempt to make an example of the UK and in so doing will potentially cause EU internal and ongoing crises with its own members that could lead to further break-up of the EU.

Whilst outcome 1 may seem far-fetched, we would hope the likely outcome will not be far from this as it is in everyone’s best interests, except perhaps the political elite in Brussels. We expect the politicians in Brussels to shout a lot but be largely side-lined as the heads of countries negotiate Brexit in a way that will serve the interests of Europe and the UK.

The following observation should help demonstrate why this may happen; Skoda, the largest producer of cars in Slovakia and the Czech Republic, sells 50% of its cars in the UK. Ireland trades in excess of £1 billion every week with the UK, which represents 70% of Ireland’s exports. We could use other countries or subjects such as security (armed force protection) as examples, but people in the UK have to understand the significant role that the UK plays in the EU; something that has largely been ignored as the debate has been an internal matter.

Hence, we suspect that the truth is likely to be somewhere between the two but closer to 1 than 2. We will continue to monitor the situation and make recommendations to investment portfolios where appropriate, in which case we will be contacting clients to confirm they are happy with any changes. We aim to help our clientele navigate through a potentially difficult economic environment and benefit from our Advanced Independent Specialist Advice.


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