It has always been our view (and I’m guessing that of the Cameron team as well) that the process would play out in a similar vein to the Scottish Independence vote
The current bookmaking odds on a UK exit vote suggest only a slim chance of a Yes.
There is still time of course for something like a terrorist outrage to shift sentiment but barring that, the consensus appears to be hardening towards the “better the devil you know” view.
George Osborne has recently played the trump card for the “Euro Remainers”, the tried and tested classic “if this happens then everyone’s house price will go down a lot”.
It’s a truth that for all the esoteric talk of economic and social consequence pro or anti, the most powerful single argument to sway voters is always that which most effects their self-interest and for the British it’s the value of their homes.
It has always been our view (and I’m guessing that of the Cameron team as well) that the process would play out in a similar vein to the Scottish Independence vote.
There would initially be lots of nationalistic rhetoric about the potential glories of self-determination but those fires would gradually cool as the implications of giving up the status quo, however unsatisfactory, for an uncertain and unquantifiable future would became less a giddy aspiration and more a scary reality so leading to a No win.
Our view for what it’s worth is that the European construct is flawed in a number of ways.
A few examples being:
- Germany exerts too much influence although it must be said, less than it wants
- The financial arrangement of having a single currency and yet allowing individual countries to issue sovereign debt not backed by a European Central Bank is a nonsense and will be a fault line that keeps opening
- The expansion of the EU state to include more Eastern states will create significant migration issues. This is especially onerous on the richer countries offering state healthcare, schooling and unemployment benefits
- There is undoubtedly a sovereignty issue with unelected bodies creating regulations that member countries are then bound to implement without rights for their parliaments to vote
- The cultures, work practices, priorities and personalities of the European countries are profoundly different; Germany and Greece or the UK and France as examples
This being said, perversely the only way that the EU actually works properly is, like the US, if it centralises more powers to the Federal.
In the US (which many site as the EU model) there are Federal laws, policing, banking, foreign policy and domestic policy. If the US was structured like Europe is currently then it would be unworkable with the likes of California and New England trying to reason directly with North Carolina, Mississippi and Texas which is a recipe for a second civil war!
However, with all the above and even with our suspicion that ultimately the EU construct could well fail we’re swayed to the “No” camp. Europe for all its imperfections does provide many benefits; we simply don’t know what happens if we leave and obviously most importantly because we don’t want the value of our houses to go down!
Investment ramifications of the vote
- The value of the pound has fallen this year generally due to the uncertainty of the vote result. We would expect it to strengthen against the dollar and Euro if it’s a remain victory
- The UK stock markets have lagged this year even though the miners and oil majors have staged a strong price recovery after February’s rout, and the FTSE100 is top heavy with commodities companies
We would expect the FTSE 100 to bounce higher with a remain vote.
The majority of markets continue to churn up and down without really going anywhere in aggregate.
There are a number of events coming up such as BREXIT, Fed interest rate rises and the US Presidential election which will strongly affect sentiment.
The situation remains broadly the same however. The return on cash is negative to inflation but the appetite to take risk is very limited. This is borne out by gold which is up 24% for the year, being one of the best asset performers.
In other areas
- Markets in Europe and Asia are cheap by historic standards and look attractive
- The US market (S&P 500) looks expensive against its long term Price to Earnings average but it can (we think) be reasonably argued that this is possibly misleading. The so called bond-proxy companies (those in the Utilities and Consumer Staples sectors particularly) which have strong balance sheets and 3%-plus dividends are selling at over 20 times multiples whilst not growing in many cases much above inflation. By comparison companies in the oil, mining, transport, motors, financial and (old) technology sectors which have more than decent balance sheets, reasonable borrowings and better growth are in the 8-12 times P/E range so the market is certainly expensive in some areas but not necessarily in all
- The performance of the Standard Life GARS Fund has been lacklustre this year and we have met with several senior people involved with the fund to establish why. Their feedback is that the last 12 months have been an outlier in terms of occurrences, with multiple developments being contrary to reasonable expectations and this is certainly true. (Oil, the halt to interest rise expectations, fears of recessions in China, the US and Europe, the rise of the Yen, devaluation of the Yuan, Zika virus etc). It has obviously been a difficult and contra-intuitive time and indeed to back this up many of the world’s long term stellar investors have had historically poor performance as well. GARS has gone through several periods of moribund performance during economic flux previously, but as calm returns and normalcy prevails it has always bounced back
We have looked in detail at the fund’s positions and nothing jumps out to us as anomalous; sometimes it’s just not a good time but we are confident this will pass.
We will rebalance all the portfolios on 1st July but we can only do this with your permission which you give by signing the rebalance form you will have received.
If we don’t have your assent the portfolio will stay unchanged.
As always our thanks to you for trusting us to manage your investments, it’s a responsibility we could not take more seriously.
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.