Financial market issues
Sterling and the wider UK stock market are expected to show material declines – how much will depend on the response function of the central banks and governments, individually or co-ordinated. How long will the market turmoil last? It largely depends on politics and how this influences policy.
A key question is ‘what is in the price?’ for investors. While flight to safety was prevalent the day after, it was noticeable that the price action in most assets was orderly in the circumstances and only took most assets to the bottom of their recent trading ranges. After a crisis (Lehmans, for example), it usually takes weeks or months for asset prices to find a new equilibrium.
The general financial opinion is that Brexit need not cause a Lehman-style global crisis. After all, investors have discussed the risk since 2015 while systemically the financial system is much stronger than in 2008; in any case, it is expected central banks to make liquidity programmes available to banks to reassure investors.
A series of different time-frames need to be examined: the near-term market fall-out, then July when a series of central bank decisions are made, October when several important political events appear, and into 2017 when UK/EU Brexit negotiations are likely to be taking place against the backdrop of some important European elections.
EU negotiations will be complex as the institutional structure alters. It was never clear what Brexit actually meant, nor is it now after the referendum. A new UK administration will need to be formed and decide what the negotiating positions and tactics will be.
In any post-Brexit agreement, there will be difficult trade-offs between access to the single market, EU budgetary contributions, reducing regulatory burdens and controlling immigration.
A Norway-style approach (i.e. variations in terms of membership of the European Economic Area) or a Swiss-style approach (bilateral treaties including Schengen membership) look challenging as these would not reverse the anti-immigration and anti-EU contribution themes which apparently won the referendum.
The timescale for negotiation is also highly uncertain. However, the UK now looks more likely to invoke the withdrawal process set out under Article 50 of the Treaty on European Union and its formal two-year negotiating window under the new “pro-exit” cabinet formed by the incoming Prime Minister, Teresa May.
Before the referendum, Leader of the House of Commons Chris Grayling suggested trying to complete the negotiations by 2019-2020, but not formally starting the two-year formal negotiations under Article 50 for some time.
How long will very much depend on whether the rest of the EU wishes to make life very difficult for the UK.
The details of the negotiations will be vital. To repeat, Article 50 determines the arrangements for the UK’s exit, not its new trade relationship with the EU. As a member of the EU, the UK is currently party to free trade arrangements with more than 50 countries and the EU is in the process of negotiating more.
A UK that has formally exited the EU would no longer be a party to those agreements either, requiring new negotiations to commence. In the interim, trade will revert to WTO most favoured nation terms and final agreements may not be as beneficial as current arrangements. The UK might also have to renegotiate the terms of its own WTO membership.
More broadly, the danger is that the populist anti-establishment vote in the UK will be repeated in other countries, where people are angry with the trend towards ever deeper integration and globalisation. Economic protectionism, geopolitical isolationism and hostility to outside groups are common aspects of such movements. The competitive model of the West needs to be re-set in terms of new measures to raise productivity, reduce income disparities and lower debt burdens. Again, this takes time.
This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action.
By Raoul Ruiz Martinez
Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333