News & Insights
“Pound Pounded” – Interview with Gary Reynolds, CIO
Transcript of Video:
- The Situation
I have to say we weren’t expecting the decision of the UK people to vote to leave the EU, so our expectations were that Friday 24th would be a boring day and it was business as usual – we were staying in the EU. So I was as surprised as anybody, when the alarm went off this morning, I grabbed my iPad, looked at Bloomberg and saw that, oh my goodness, it’s likely we’re coming out of the EU. We’d already arranged for the Investment Team to get in very early. I was in the office at 04:30 – I’ve got a short commute so it’s pretty easy for me and then other people start to come in and we’re watching the news emphatically. And it becomes clearer and clearer that we are coming out. Now the damage had already been done to the pound. That happened about twelve o’clock midnight on the 23rd. The moment that the first polls were returned and the votes were counted and it became clear that “Leave” had got a lot of traction, the pound was trashed – very quickly fell about twelve per cent – and it stabilised a little subsequently but it’s been difficult and then stock markets, we can see what happens on stock markets overnight even they’re not trading because futures on the major indexes are traded all around the globe so we can always monitor that, and we knew the FTSE would open with a big collapse first thing this morning and that’s exactly what happened. Things are stabilised a little now but we always said that if there was a vote for “Out” it was going to cause short term volatility and, unfortunately, that prediction has proved extremely accurate.
- Courtiers Investment Team Response
As things unfolded this morning, what we had to decide as an investment team was, do we start to sell some of the dollars that we we’re holding as a hedge against the UK voting out? So we had large exposures to the dollar in our Growth, Balanced and Cautious portfolios and they have cushioned the blow of the asset price declines in the short term. But what you’ve got to decide is how much more cushioning do you want? So we decided pretty early on we would start taking some profits because whilst we were betting on the pound getting weaker, particularly when it rose to £1.50 against the dollar we thought at £1.32 – £1.33, the lowest it’s been since the eighties – it suddenly looks much better value. So we started to take some of that off and we will look at this throughout the rest of the day to see whether we go any further. So short term, for us it was very much a case of what’s protected us? Do we now sell it? And we decided we would we would take some profits.
- UK Investors: Thoughts
UK investors, whilst they’ve woken up to their assets being worth a little less than they were the night before, have generally voted to come out. So one assumes that this was a price that the average UK investor thought was worth paying. Of course the UK investor that voted to stay in will be bitterly disappointed and will probably be blaming other UK investors that made the decision to leave the Union – the European Union. But I think what it means on the whole for investors is you’ve got to proceed with a lot of caution over the short term. Political uncertainty is one of the most difficult things to dissipate within a portfolio. Its effects can be quite damaging, but you don’t necessarily read how a political situation will work its way out. So the number of possible scenarios coming out from this decision are immense and already this morning we’ve begun to work out that there are a lot of different directions that the UK and the EU may go following what is a decisive and quite shocking vote to leave.
- Impact on the EU
The whole of the EU would have been watching the UK yesterday and today, fascinated by what decision the British people would take with regard to their future relationship with Europe, and politicians across Europe have got up this morning and they’ve seen what happens to a leader that doesn’t call the opinion of the people right. David Cameron, having been elected with a majority last year has lost this referendum and as this morning already announced that he’s going to fall on his sword after three months and make way for a new leadership. So perhaps this will cause a major rethink of the whole European project, because it’s possible that it’s going to be very very difficult indeed for the politicians of Europe to keep this centralised federal move going even over the short term. So we could see very quickly other countries wanting their own referendums. A Danish friend of mine said Denmark will follow suit if the UK goes out and will vote out. The Dutch look like they will be very keen to have a referendum and Le Pen is already trumpeting the achievements of the out campaigners in the UK. So there will be more pressure on the French, the Dutch, the Danes the Belgians, the Austrians – everybody – there’ll be a lot of political will now to try and get referendums in their own countries and in as much as there’s a threat to the union in this country, because the Scots voted clearly to stay in, so the SNP will probably want to have another referendum on Scottish cessation of the Union. So whilst our union may start to shrink, who knows, perhaps the European Union will start to shrink too.
- The UK Government’s Role
For the UK Government, for the major ministers certainly the Prime Minister and Chancellor, the vote has made their position untenable. I personally thought David Cameron showed great dignity this morning when he gave his resignation speech. The landscape though is interesting because evidence suggests that the majority of Tories voted out. So this is likely to have a unifying effect on the Conservative Party and if they can find a credible leader by the time, or around the time of the Conference, because that’s what David Cameron has said – he’ll stay in power for about another three months until the time of the of the Conservative Party Conference – if they can find a credible leader that can step into the shoes of Cameron and become the new Prime Minister and unify the Party then they could go on, negotiate the exit route, and that could actually have a big unifying effect on Tory MP’s, which would probably be devastating for UKIP and it may actually ironically mean that the Conservative Party is one of most unified parties going in for the rest of this term of this Parliament. But there will be issues as to whether we could see the Government that we elected in 2015 fall and have a new government put in place, albeit from the majority party, but with ministers that weren’t necessarily around for that election, for those prominent positions in 2015. So there could be some pressure to have another election. But, I think the outcome of that would be uncertain and it’s difficult to see where the credible opposition will come from, from the other parties. I think what will be clear then, the Conservative Party with leaders clearly committed to negotiating a new good deal coming out of Europe would be in tune with the feelings of the whole country. So for the UK this actually might produce, ironically, some political certainty at least with regard government support.
- Impact on the Global Economy
There is no doubt that the vote to leave the EU is very very bad news for the economy short term, and probably bad news for the European economy, and probably bad news for the US economy. And the reason is this; nobody right now knows what the free trade area of Europe will look like in the future. Nobody knows whether these trade agreements in place between the EU and other nations will hold longer term. So where do we end up with world trade going forward? Will the UK, if the EU survives in its current format, be able to negotiate free trade with the rest of Europe? Now the reason this is bad news for the economy is because companies need longer term certainty when making decisions on investments and where they’re positioning their new factories, their new offices. So for a while it’s likely that big business will be reining in capital expenditure and that will have a detrimental effect on the economy both sides of the Channel. For the Americans, it’s bad news because the dollar just got very strong, so this is going to make American imports cheaper and American exports more expensive. As American exports become more expensive, and if you’ve got a slowing economy in the UK and Europe, which is likely, then that’s bad for American jobs. So it’s not good for the US economy either. So in the short term we’re going to see downward pressure on economic growth and perhaps a recession in Europe and possibly in the US.
- Courtiers Next Moves
In these periods of uncertainty, it’s absolutely essential to look long term and not get too bogged down with the short term. So we are mindful of the fact that we hold client’s assets for generally very long time horizons – normally a minimum of five years, but very often ten years plus – and we’ve got clients where we’ve looked after their assets for over thirty years. So we have to be very mindful of the fact that we’re making long term decisions all the time. And, if you can hold on to that and look at the value of assets with a view to five and ten years, you increase your chance of making good decisions compared to being buffeted around by the wind of change and trying to change tack on the perception of every change in the wind. It doesn’t work like that. You will not make good decisions with assets if you behave like that. So we will keep doing our work on the fundamentals, but we are very mindful that the most difficult risks for us to deal with are political risks, because they have nothing to do with value and there are a stack of uncertainties that can hit you as has happened today. So we will hedge out risks wherever we possibly can, we will not get over-concentrated in any particular asset, and most likely, we will still keep the US as our favoured equity market because it is less reliant on exports and imports than virtually all the other major economies. So in the end if things don’t work out well, the US is the one economy in the world that can generate its own growth through its own internal and domestic efforts and that probably gives the edge of American companies over other businesses right now.
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