By John Redwood
The win for Brexit came as a shock to markets. We think the gloom should not be overdone. The UK can earn a good living outside the EU and negotiate new business arrangements with the rest of the EU.
At Charles Stanley we have run four different scenarios, called Good and Bad Remain and Good and Bad Brexit. The good news is we have always thought the good versions the more likely. Markets have been too excitable and have exaggerated the likely changes from staying in or leaving. The case for selling UK assets on Brexit is based on two concerns. The first is the idea that trade will be badly damaged, as the rest of the EU erects new barriers and imposes tariffs on its imports. We think this is not a likely prospect. In the short-term trade will continue under existing rules. There will be a negotiation. Once the immediate anger and hurt has calmed down both sides will see the need for agreements that do not impose new barriers, as the rest of the EU sells more to the UK than the UK sells to it. There are also very low limits on tariffs that can be placed on most items under WTO rules, which apply to both the rest of the EU and the UK.
The EU does have free trade agreements with a number of smaller countries. These novate to both the rest of the EU and to the UK unless one or other side in each case does not wish that to happen. I expect all those countries to wish to carry them on with both the rest of the EU and the UK. The EU could not stop their novation to the UK. The UK will also be free to commence negotiations of its own free trade agreements with all those countries like the USA, Brazil, India and China that the EU does not currently have an agreement with.
The second worry people have is the possible cancellation or diversion of inward investment which might have come to the UK. This is always possible, and has occurred at times to the UK within the EU, with a number of factories and facilities being transferred to other EU locations, often with EU grants to help. The leading car manufacturers have all stated they have five-year investment plans and have not threatened to cancel these on Brexit. There might be a few high profile announcements from others in the post Brexit atmosphere. There could also be others who found the UK more attractive if sterling falls and the UK becomes more price competitive. All the time the UK runs a large balance of payments deficit, which seems likely for this year, there will continue to be big inflows in one form or another to pay the bills.
The third is the worry that services in general and financial services in particular may lose passport access to the single market and may encourage some large banks or investment houses to locate more of their activity elsewhere in the EU. This was mooted when the UK did not join the Euro, but overall did not prove to be the case. It is possible some activities will divert. Some on the continent want to make a point to try to put other electorates off wanting to leave the EU. There are various ways of handling any loss of official passports. The US, Japan and others have reasonable access to the financial service market under current rules. For the time being the passports stay pending negotiations on what the post Brexit trade arrangements will be, if different from current practice.
Overall, we accept the collective will of the markets is likely to be negative for a few days. With a lower pound the large exporting companies could then look attractive. We do not expect a Brexit recession, nor a punitive post Brexit budget. Once UK asset values have stabilised after the sell off they are more likely to be influenced by the fortunes of the dollar, the state of the US and Chinese economies, and by world growth, as they were before the referendum triumphed in the financial press. We will offer further advice when markets have got over their initial reactions.
John Redwood is chairman of the investment committee at Charles Stanley
