A week has gone by since the stupefying referendum result from a people otherwise reputed as being extremely democratic and open-minded. Initial comments and analyses have failed to clarify the debate or outline a roadmap for after article 50 of the Lisbon Treaty has been invoked – an act required to withdraw from the European Union as the UK is expected to do in September. On the one hand, the UK has woken up totally unprepared and stunned by this uppercut blow delivered by its people, with none of the current political parties ultimately wishing to assume the responsibility of the result or manage future negotiations. The firm, collective stance immediately taken by the rest of Europe has also come as a surprise, although this position has not been adopted particularly serenely and may well simply represent posturing ahead of future discussions. As the ascetic Alexis Tsipras learned at his own expense, it is difficult to negotiate with that which that you have humiliated (i.e. the European Union). Political leaders on the continent will probably interact bitterly with Britain, which is requested to leave the premises in order to respect the popular ballot, but without any set timeframe.
Continued access to the benefits of the single market should be difficult to obtain and expensive; otherwise, what would be the point of the union? After the existential angst of last Friday and Monday, financial markets now seem to be banking on the incertitude coming to an end. This is either because the political elite in the UK will inevitably retreat in the face of the heavy implications of the Brexit, or because the EU will adopt a firm stance which will rapidly lead to a definitive exit without compensation. Under both of these hypotheses, investors can ultimately focus on other factors. The only remaining doubt, in the event of a definitive exit, will be a question of economics, as the UK will face a more challenging period or even tip into recession. This would automatically impact growth in the eurozone. Although no one would risk predicting future events, the final outcome is nonetheless far less obvious than the result of the ballot would imply. Focus will shift back to the economy (macro and micro) as investors scrutinise indicators to try to identify any changes in economic behavioural trends. Like corporate business leaders, our portfolio management teams will weigh the risks and opportunities.
Strangely, the eurozone perhaps remains the most appealing region in which to invest. Elsewhere (dollar, renminbi, yen and sterling zones), the economic balance is just as complex and even fragile in certain cases...except in the eurozone, where a series of institutional crises have nonetheless led to greater solidarity between member countries and ensured the survival of a currency union that certain observers had referred to until now as “an experiment”. We must avoid being unduly triumphalist however, as financial markets will remain volatile and vulnerable to crises caused by political mistrust. Nevertheless, economic fundamentals will drive long-term trends.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 1st, 2016.
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