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Episodeblog Quicktake: The Brexit vote delay and UK leadership contest

There’s been some clamour around everybody’s favourite UK-related subject this week: Brexit and politics are once again grabbing the headlines.

Given the extent of coverage I thought it worth recapping (briefly) how our view on these matters is formed and how we might begin to assess the relevance of recent developments.

Just before I do that though, I think it is worth considering two approaches you could have taken to Brexit “analysis” since the result of the referendum in 2016. On one hand, you could have followed every twist and turn of the process, keeping up with commentary, the path of negotiations, political wrangling at home and abroad… On the other you could have ignored these intricacies completely.

Whichever approach you had followed, you’d be hard pushed to notice any difference in your level of useful knowledge today compared with the day after the vote.

As investors, and with a healthy dose of hindsight, we may convince ourselves that market moves such as the declines in Sterling after the vote and more recently were obvious and predictable.

We should be wary of this temptation. Aside from the risks of our own tendency to reinvent history we must ask why would markets have offered such a gift? If ‘everyone knew’ Sterling would fall, presumably it would already have done so.

What really matters?

My view on all of this has been that the only pertinent question to consider around Brexit is the extent to which the UK’s future trade environment has (or will be) changed over a meaningful timeframe.

And of course, the obvious answer to this is that we don’t know. When we consider probabilities, however, we can make a few assumptions. Given that the referendum was called for what seems to have been short-term political expediency (addressing a hotchpotch of economic and social matters and a political desire to be ‘tough on immigration’) rather than an ideological shift away from the notion that efficient, external trade relationships are a good thing, it seems more likely than not that whatever trade deals the UK economy ends up negotiating, the overarching principle will be one of engagement in trade rather than retrenchment.

In this respect, and only when pushed for a ‘view on Brexit’, I’d say the likely end point (i.e. the relevant, pertinent question) is a place not terribly different to where things are today (undoubtedly worse in some areas and better in others). Any more than that (and there is potentially lots more than that) is guesswork.

So how does the postponement of Tuesday’s vote fit in to this?  It depends on whether the answer to our pertinent question (around trade ideology) has changed.  And again, this is unknowable but I think fair to assume ‘not much’ – even in the scenario of a ‘hard brexit’ which causes short-term disruption (ranging from trivial to serious) it is not clear if a ‘bad exit’ will change the overall trade disposition of the UK in the longer run.

The political backdrop

I guess the most relevant additional question is to what extent the latest development on the Conservative party leadership increases the odds of an anti-capital administration. We obviously can’t answer this either, but my view would be that it probably does increase the chances of such a thing (via a Labour government) but only from very low to low.

The evidence I’d point to for this is the latest opinion polls which put the Conservatives on 40% and Labour on 35%; furthermore, on the question of favoured Prime Minister, Theresa May registers 36% versus Jeremy Corbyn’s 23%. The latest poll was at the end of November, so it’s conceivable that things have changed – but if Labour hasn’t been able to convince people it’d be a better alternative to what is widely perceived as a floundering government by now, it’s tough to argue they’re suddenly on the brink of power.

Considerations of Investors

At the best of times it is very difficult for humans to admit that there are things that we just can’t know with certainty. This becomes harder still when issues are emotive.

However, successful investing involves being able to assess probabilities well, and when it comes to the major errors most investors make, the source is often overconfidence about what the future holds, not underconfidence. Few look back at investment mistakes and complain that they were ‘too humble.’

So what should we do? Same as before: look for sharp price moves as possible opportunities. Moves in gilts were relatively notable. Thirty-year gilts in the UK saw a significant price increase over the last couple of days, taking yields to 1.7% before inflation.

Sterling has dropped to its lowest versus the US Dollar since early 2017. However it is worth noting (given the extent of commentary about the currency that seems to greet every twist and turn in the Brexit story), that the move over the last five days is only around 1%, not even among the largest movers globally.

Overall these moves have done little to change things significantly. It is natural for us to feel uncomfortable given the panicked tone of much news coverage in the UK at the moment, but we should resist the urge to let this influence our investment decision making.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.