Bracing for Brexit
Author: Kevin McCreadie
February 25, 2019
On the morning of June 23, 2016, the day of the Brexit referendum, I was in London with clients and asked a few of the guys around the table how they voted. None of them had or even planned to, nor were they too worried about it. As they put it, “Nobody wants to leave. Why would anybody want to do that?”
It’s the same question that many people continue to grapple with even now, almost three years after the historic vote to separate from the European Union. This time, however, it is borne from growing fears of an unruly departure that capsizes markets and plunges the global economy into recession.
Investors, for their part, have become more nervous by the day. And with market volatility set to increase leading up to the March-end Brexit deadline, nerves could get even more rattled if no deal is in place by then.
To date, reaching an agreement that satisfies all parties has not been an easy task. Britain, like many countries that have spawned populist movements in recent years, has shown itself throughout the process to be a deeply-divided nation – especially when it comes to the issue of globalization and its main tenets of free trade and open borders.
Investors, for their part, have become more nervous by the day.
Those who want to stay in the E.U. believe the free flow of people and goods is an unequivocal benefit to society and an essential element to the continued well-being of the country’s economy.
But those who want to leave are far less enamoured with that argument. They view immigration as a growing threat to their livelihood and consider membership fees in Europe’s economic bloc as a multi-billion pound waste of money that is facilitating exactly what they fear.
Given these two solitudes, a number of Brexit scenarios have been contemplated and crafted, but none have been able to pass muster. This includes the plan tabled by British Prime Minister Theresa May in January. Drawn up by British and European negotiators, it was resoundingly rejected by U.K. Parliament in one of its most lopsided votes in history.
The 500-plus page tome outlines, among other provisions, how much the U.K. would owe the E.U. on its withdrawal (approximately £39-billion) and what happens to U.K. citizens living elsewhere in the E.U. and vice versa. It also provides for a 21-month transition period to negotiate a new free trade agreement with the European Union.
The major obstacle in the deal, however, relates to the border between Northern Ireland and the Republic of Ireland, which will also become the border between the U.K and E.U. following Brexit. Both sides want to avoid a hard border given Ireland’s troubled history, but disagree on a major detail in the solution, also known as the “backstop.”
So what does all of this mean for markets as time runs out on getting a Brexit deal in place?
In particular, the U.K. wants to put a time limit on the backstop, which, in effect, would keep it in the E.U. customs union only for a limited period. But the E.U. is adamant that any backstop must be applied “unless and until” it is no longer needed and seems unwilling to budge on its position.
The most likely outcome is an agreement of disagreement, resulting in a deadline extension beyond March 29. This doesn’t necessarily solve much longer term, but kicking the can down the road is familiar terrain for those who remember the European debt crisis and “Grexit,” and would offer investors a welcome reprieve from all the current hand wringing.
…kicking the can down the road is familiar terrain for those who remember the European debt crisis and “Grexit”…
An even better, but less likely, scenario would be both sides reaching a “soft” Brexit deal before the existing deadline. In this case, more time may still be needed to pass all the necessary laws, but fears of a market collapse would be greatly diminished.
The worst outcome facing investors, meanwhile, is that no deal is reached, prompting a “hard” Brexit from the E.U. This would be extremely disruptive to markets and could contribute to extreme food and medicine shortages, mass corporate re-locations, and spark the potential for much higher inflation and dramatically increase the chance of recession across Europe if not globally.
There is one other option, of course. Beyond these possibilities, Britain could choose to hold a new referendum. This would be well received by many investors, particularly those who believe a re-vote would lead to a reversal of the decision to leave the EU. But it’s also not without risk given many others believe it would undermine an already fractured political climate.
At least one thing is for certain. If another referendum is called, those who didn’t vote the first time around, won’t make the same mistake twice.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
The commentaries contained herein are provided as a general source of information based on information available as of February 22, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
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Written by
Kevin McCreadie, CFA, MBA
CEO and Chief Investment Officer
AGF Management Limited
