Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, James Klempster, Head of Portfolio Management at Momentum GIM on why we should be making the most of the Brexit situation.
The UK and Europe can be forgiven a brief period of soul searching, but protracted self-pity is not in anyone’s interest. Ultimately the public have spoken and regardless of one’s view of the result it is incumbent upon everyone in Europe – businesses, politicians and consumers alike – to do their utmost to make the best of it.
Business’ natural inclination is to do just that – management is paid by shareholders to make money in all environments – but while there is such great uncertainty over the region it is understandable that businesses may sit on their hands. Doing so raises the spectre of a recession both in the UK and on the continent and as a result we would do well to see the politics settled as soon as possible. We will also likely see further intervention from central banks, but arguably we have seen diminishing returns on their actions for the past couple of years already.
The last piece of the puzzle, the consumer, will be concerned today, but we need leadership to calm the nerves and to keep sentiment on as even a keel as possible, ensuring the engine of our economy continues to consume and provide a backstop to business. Companies will change and adapt to prosper in the long run, but management will not invest meaningfully until they understand the regime in which they operate.
One Off Events a Regular Occurrence
It seems all too often in recent years that we have written about ‘once in a generation’ events: Lehman going bust and the ensuing financial crisis; the unprecedented levels of government asset purchases; negative interest rates; and, as of last week, the momentous decision by 52% of UK voters to leave the European Union.
The overarching feeling is one of surprise, with even high profile pro-Exit campaigner Nigel Farage conceding that it "looks like Remain will edge it" soon after the polls closed. The coverage in both social media and traditional media has been sensationalist and with many bemoaning that the referendum has been used as a vehicle for the expression of political dissatisfaction rather than a genuine and well informed desire to leave the European Union.
This is over simplistic and forgets that globalisation and the opening up of our continent’s internal borders has not been kind to all, with less educated and lowly paid workers feeling the brunt of changes in recent decades. There has been substantial pressure felt in our industrial heartland thanks to the slow decay of traditional heavy industries such as mining and manufacturing, which have changed beyond recognition since Britain joined the EU.
Whether this change is coincidence or not is moot. What is clear, both with respect to national politics for a number of nation states and for the EU edifice as a whole, is that large swaths of voters do not feel that the distant machinations of the Union represents them.
What Next?
The EU seems resolute and inflexible to change and while it has a large number of benefits, polls within founding states such as France and the Netherlands suggest that popular opinion runs well short of the ‘ever closer union’ that is surely necessitated by a currency union. The EU will do its best to ensure that this is not a watershed moment for the bloc, but if they try to make an example of the UK then it would risk the longer term prospects for both the EU and the UK because there are mutual benefits that stem from trade.
Friday brought with it significant market moves. Some seem justified while others seem indiscriminate and arguably overdone. It is difficult to see why, for example, the US should end the day down 3.6%, whereas given the question marks hanging over the European project, a fall of 5.9% for the continental markets seems more appropriate. Identifying where asset class returns are likely to be muted going forward and/or require a higher associated risk premium, compared to those areas of the markets where the falls have been overdone and offer good value, is now the key for investors.
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