We are very aware that we are producing a blizzard of emails and updates post BREXIT but these are indeed extraordinary times.
Key events
There have been a number of significant events and announcements in the last ten days beyond the historic meltdown of the main political parties, and the resultant soap opera of betrayals and career assassinations that have dominated the news cycle.
In periods where a lot happens very quickly it is often the case that profound long term developments are not initially recognised as such.
So under noted are some headlines and comments we think are significant.
UK PLC
The Chancellor and the presumptive new Prime Minister both announced that the cornerstone of Government economic policy; to balance the budget by 2020, was no longer.
The last six years of painful cuts, austerity and below inflation pay rises for the public sector were for nought.
From now on it’s about doing whatever it takes to keep UK PLC from recession, and from losing foreign investment and jobs; this is the new top priority and it will cost plenty.
The additional amount we need to borrow to do this, in a period where our tax receipts fall, will potentially balloon the deficit.
So goodbye to fiscal responsibility, hello to whatever it takes.
Tax haven status
George Osborne announced his intention to cut the rate of Corporation Tax from 20% to 15% as soon as possible.
As a comparative the US currently has a corporate rate of around 35%.
So the future of the UK appears to be envisioned as a low tax country, attractive to global companies as a tax haven.
This is all starting to challenge the Brexiteer argument that the money we paid to Brussels could be saved and instead spent on the NHS and schools. The reality is dawning that to persuade companies to stay, or to attract new ones necessitates asking them for far less tax.
There was never any way of knowing in detail how the financial implications of BREXIT would shake out, but the argument put forward that we could just keep all the money with no consequential losses from leaving was, well let’s just politely say ‘highly optimistic’.
London property
The announcement by commercial property funds that they are stopping redemptions is not that unexpected.
The unknown but plainly sub-par future for commercial property, London in particular, post BREXIT has created a rush for the exit (redemption requests) and as we have always believed is why it’s a systemic flaw to owning illiquid assets in a supposedly liquid fund wrapper (we’ve never owned this type of fund in the portfolios for exactly this reason). All will be well in good times but in a rapidly deteriorating environment many will want out simultaneously and that can’t be accommodated.
The big questions for London are whether it can retain its status as the preeminent financial centre along with New York, and do major multinationals move head offices to other capital cities?
The thinking regarding property is that an outflow of corporates from the capital over time will create property voids, and consequentially lower future rental values.
The Corporate Tax reductions will help in this regard, though how much lower will be enough?
And finally…….politics
It is always difficult to win the argument that any current situation is better than an alternative, as the frustrations of the actual will always be more acutely felt than any imaginings of an alternate and unknown reality.
People are now just starting to see the effects of leaving and it’s only the beginning.
Our view for what it’s worth is that with virtually half the UK voters wanting to stay in the right leader (PM) is someone who sympathises with this electorate whilst following the wishes of the majority to leave, at least some balance and cohesion is then achieved.
It would be fascinating to hold another referendum in six months. We strongly suspect the result would be very different but it’s not going to happen and we all must now make the best of the new normal.
Conclusions
Over time things happen around the world to countries and continents, and as they are not directly related to us we acknowledge them but are not overly concerned as they don’t impact personally.
BREXIT is us, it’s happening to us, but equally beyond a week or two of headlines around the world they will move on because it’s not them.
By investing globally, we can become effectively stateless in terms of the economic effects of country specific news, as has been illustrated over the last week by the performance of the portfolios.
What happens to our country is of huge importance to us socially and ethically, but it’s wise not to have it that way financially.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.