Episodeblog Quicktake: The Brexit vote delay and UK leadership contest

We should be wary of this temptation. Aside from the risks of our own tendency to reinvent history we must ask why would markets have offered such a gift? If ‘everyone knew’ Sterling would fall, presumably it would already have done so.

What really matters?

My view on all of this has been that the only pertinent question to consider around Brexit is the extent to which the UK’s future trade environment has (or will be) changed over a meaningful timeframe.

And of course, the obvious answer to this is that we don’t know. When we consider probabilities, however, we can make a few assumptions. Given that the referendum was called for what seems to have been short-term political expediency (addressing a hotchpotch of economic and social matters and a political desire to be ‘tough on immigration’) rather than an ideological shift away from the notion that efficient, external trade relationships are a good thing, it seems more likely than not that whatever trade deals the UK economy ends up negotiating, the overarching principle will be one of engagement in trade rather than retrenchment.

In this respect, and only when pushed for a ‘view on Brexit’, I’d say the likely end point (i.e. the relevant, pertinent question) is a place not terribly different to where things are today (undoubtedly worse in some areas and better in others). Any more than that (and there is potentially lots more than that) is guesswork.

So how does the postponement of Tuesday’s vote fit in to this?  It depends on whether the answer to our pertinent question (around trade ideology) has changed.  And again, this is unknowable but I think fair to assume ‘not much’ – even in the scenario of a ‘hard brexit’ which causes short-term disruption (ranging from trivial to serious) it is not clear if a ‘bad exit’ will change the overall trade disposition of the UK in the longer run.

The political backdrop

I guess the most relevant additional question is to what extent the latest development on the Conservative party leadership increases the odds of an anti-capital administration. We obviously can’t answer this either, but my view would be that it probably does increase the chances of such a thing (via a Labour government) but only from very low to low.

The evidence I’d point to for this is the latest opinion polls which put the Conservatives on 40% and Labour on 35%; furthermore, on the question of favoured Prime Minister, Theresa May registers 36% versus Jeremy Corbyn’s 23%. The latest poll was at the end of November, so it’s conceivable that things have changed – but if Labour hasn’t been able to convince people it’d be a better alternative to what is widely perceived as a floundering government by now, it’s tough to argue they’re suddenly on the brink of power.

Considerations of Investors

At the best of times it is very difficult for humans to admit that there are things that we just can’t know with certainty. This becomes harder still when issues are emotive.

However, successful investing involves being able to assess probabilities well, and when it comes to the major errors most investors make, the source is often overconfidence about what the future holds, not underconfidence. Few look back at investment mistakes and complain that they were ‘too humble.’

So what should we do? Same as before: look for sharp price moves as possible opportunities. Moves in gilts were relatively notable. Thirty-year gilts in the UK saw a significant price increase over the last couple of days, taking yields to 1.7% before inflation.