InvestmentsJul 22 2016

Brexit regrets

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Brexit regrets

Economic reality

One of the reasons for the unexpected result was that this is also the high tide of globalisation. The 10 per cent of the elite who have benefited from this are unconscious of the 90 per cent who have suffered.

Over the past decade, the number of working poor households in the UK has increased by more than 2m – a 25 per cent increase in the rate since 2000. The official definition of ‘absolute poverty’ is for those in households with less than 60 per cent of median income, and is generally calculated after housing costs of mortgage payments or rent.

Quantitative easing (QE) has allowed politicians to avoid the pains of real reform by ensuring that the working classes pay it. QE has done nothing for economic growth, but has been marvellous for asset prices.

House prices have risen by more than 10 per cent in real terms over the past decade – by more than 50 per cent in London. The average London tenant pays a third of their disposable income on rent, compared with a quarter one decade ago.

Also full-time – let alone well-paid – jobs are scarce. At the lower end of the skill range, all too many workers are forced onto zero-hour contracts, or can obtain only part-time jobs. Large companies have made uncontrolled immigration worse by recruiting and importing company-wide workforces from Eastern Europe and paying them well below local wages.

So apart from housing shortages, school-place worries, and pressure on local surgeries and hospitals, 90 per cent of English and Welsh workers have had real cause for concern.

Yet senior Westminster politicians, faced with such worries from voters on their referendum campaign, were at best patronising and at worst oblivious. As always throughout English history, workers reacted by turning against the elites, just as they are doing in the US with their support for Donald Trump.

To Brexit or not?

Eurocrats and continental politicians are urging Britain to trigger Article 50 of the Lisbon Treaty and so formally start the presumed two-year exit of EU laws and obligations. They have reason to be nervous: it is not only English voters who are capable of seeing that European parliaments and institutions are full of hard-faced men who have done well out of globalisation.

Discontent is growing because the EU has produced only economic stagnation, youth unemployment and political stasis since the banking crisis.

The longer the Brexit crisis lasts, the greater the threat to European financial stability. Since 2006, and the opening of the banking crisis, the ratio of European government debt to GDP has grown from an average of less than 70 per cent to more than 90 per cent (except for Italy at 135 per cent).

With no economic growth worth the name, these debts will continue to grow. But the problem is worse than that.

Most of Europe’s pensions are unfunded, and so must be paid from current taxes. Without economic growth, cutbacks in welfare spending will be needed, and pensions are one of the largest areas of the welfare budget, especially as we are all living much longer.

Continental chancellors have yet to show the courage of former chancellor George Osborne, with an attempt to restructure a welfare state that can no longer be afforded.

Where next for Brexit negotiations?

While Eurocrats may huff and puff, only the UK can initiate Brexit. Until then we remain a member of the EU with all rights and responsibilities. In a cross-Whitehall message, sent after the result was known, the head of the Civil Service ordered, “the will of the British people is an instruction that must be delivered”. But a referendum is not an instruction to parliament – simply the expression of a desire.

MPs are representatives and not delegates. The new leader of the Conservatives, Theresa May, might want to secure her position through a new general election, but this requires a dissolution vote in a world of fixed-term parliaments.

This may be difficult to achieve in a House of Commons not only with a majority of ‘remainers’, but where referendum alliances are breaking up tribal loyalties. Such alliances between like-minded MPs on Brexit and ‘remain’ have already sabotaged the traditional discipline of the whips.

Not for the first time in British history, the house will have to save us from our own folly and that of government ministers. The constituency structure of Britain is good at articulating citizens’ concerns straight to the centre of power, while the weakness of whatever new government will be in place by September will ensure that they are heard.

It is not only David Cameron’s social reforms that would-be Conservative leaders are pledged to. Constitutional reform and the full devolution of the UK have now become centre stage to whatever deal must be done with the EU.

The way ahead

The Eurocrats are proclaiming no negotiations before Article 50, but sotto voce, actual leaders suggest otherwise. Political problems are brewing in Europe, especially over the political legitimacy of the EU state and growing fears about immigration. These wage pressures are worsened by technology – a recent US report showed that 80 per cent of recent US job losses came from technological changes and not immigration or outsourcing.

Brexit is giving courage to workers across the continent, who are feeling ignored and patronized by those who have done well from globalisation.

Migration control is key to whatever deal a new Conserva-tive government proposes and, at this moment, it is difficult to believe that Britain and the EU can square that circle. But given the possibility of a US president Trump in November, and elections in Germany and France in 2017, no one can foretell how matters might change.

Therefore investors need to remember that investment is about buying income with capital, and accepting that markets go down, but also up. Only equities will protect retirement income, but at the cost of regular price fluctuation, which will sometimes be violent.

This is not the time to invest on an index basis – good and accountable managers are required who will find companies that make money in times that are politically as well as technologically testing.

Geographical and industry specialisations

Although investment trusts have outperformed other types of managers over recent years, it is time to reconsider their remits. This is the time to turn away from UK and even European markets as these are going to be plagued by political uncertainty for years to come.

This is the time to search the AIC and Numis Securities websites for investment companies with an inter-national outlook and those with an interest in technology. The unravelling of the human genome more than a decade ago has opened up opportunities in medicine, and the ramifications of digitisation continue to reduce corporate costs at the same time as it cuts jobs.

This is the challenge for investors and politicians. Happily, it seems the challenge of the Conservative leadership is concentrating minds.

If this continues, Brexit may turn out better than expected so that, as after the Battle of Trafalgar, when Pitt the

Younger was toasted as the Saviour of Europe, he demurred, insisting that Europe was not to be saved by any one man: “England has saved herself by her exertions and will, as I trust, save Europe by her example.”