As it is now a week after the momentous decision taken by the UK to vote to leave the EU (17.4m/52% vs 16.1m/48%) I felt it appropriate to once again make some observations that I hope you will find of value:
- The UK stock market has not (yet) reacted as negatively as was initially feared and neither has the value of sterling. The most severe impact has been seen in the UK sensitive FTSE 250 and the decision to remove the UK’s AAA rating, but to date the FTSE 100 has shrugged off the result and there has been no sharp rise in the risk premium on UK assets.
- Pessimism and optimism with regards inflation, interest rates, real incomes, job security, further monetary easing (hence sterling and gilt levels) and UK competitiveness continues to be heavily debated. I can’t see how this will not remain the case well into the foreseeable future until the relationship with the EU and the rest of the world becomes more obvious.
- By Friday 9th September the Conservative Party will have chosen its new leader, giving the new Prime Minister some 3 weeks to reshape his/her administration ahead of the Conservative Party conference and the return of Parliament. Surprisingly, Boris Johnson (the favourite) has ruled himself out, so now it is Theresa May who becomes the one to beat. Other contenders include; Michael Gove, Liam Fox, Stephen Crabb, and Andrea Leadsom. It is worth noting that Theresa May was a Remain supporter, albeit a quiet one.
- The Labour Party leader, Jeremy Corbyn, has placed the Party in an extraordinary position as he continues to refuse to stand down despite an almost complete collapse in support from his fellow MPs (and 20 members of his Shadow Cabinet), being generally seen as ineffectual and never a PM in waiting. The UK actually needs a strong opposition party over the coming years so we can only hope that Corbyn and his close partner in his defence, John McDonnell (Shadow Chancellor), accept the damage they are doing and go quietly and quickly. Rumour has it that Corbyn wants to resign but McDonnell will not let him – citing the overwhelming support he received from Labour Party members only a few months ago. The latest twist is that Angela Eagle (a former Shadow minister) seemingly found the support to launch a challenge for the Labour leadership but then decided not to proceed.
- I believe that the Chancellor will wait for the new PM to be selected and will then look to step down from his current position. Whether he will be given a different Cabinet position is as yet unclear. However, I believe the Autumn Statement will be given by a new Chancellor (who that may be is also unclear) and it will be more bespoke to the current political and likely economic environment than the existing, needing to be more stimulus biased. A new economic strategy will emerge.
- In my opinion it is most likely that Article 50 will be invoked sometime between the Conservative Party conference and the year end. Pressure from Brussels to act sooner will fall on deaf ears! I would also not be at all surprised if behind the scenes there is an ongoing attempt to tackle to the more emotive issues raised by the UK voters and inherently felt throughout Europe – Immigration (free movement of people) and laws (the challenge to our sovereign rights). This is where the independence momentum is most likely to go viral.
- Currently EU officials are saying that the UK has to have left the EU after invoking Article 50 before it can negotiate the trade terms with the EU – this would mean that any trade between the UK and EU would be based on current World Trade Organisation rules until a new deal is completed. So the UK has ahead the exit negotiation and then a new trading relationship to negotiate. But rules are there to be broken!
- There is a perfectly reasoned argument that says a new PM and Chancellor might call for a General Election once they understand better the relationship most likely to be negotiated with the EU. Especially if the Labour Party is still weakened by intra-party disputes and unrest. This could even be seen as a second referendum if it was pitched as such!
- But before those UK/EU relationship conversations become any more transparent, Europe will need to see who leads France and Germany. France has its presidential election in April/May 2017 (with the current Socialist Party and Hollande unlikely to be re-elected) followed by the German federal elections in September 2017 (with Merkel – CDU – likely to remain in place, but the coalition she leads is not so certain).
- So, a new administration in Paris and then Berlin prior to any likely resolution of relationship parameters or terms. Well into the 2 year period and hence my suspicion that an extension may be considered necessary at some point.
- I am not sure that we can look to Norway, Switzerland or Canada for exactly what will emerge. My belief is that it will be a mixture of all those and also some new. I am also inclined to think that with the benefit of hindsight the UK may even reach the conclusion that leaving was the in the Nation’s best interests – especially if the rest of Europe is dealing with other calls for Independence alongside the inevitable flaws in the Eurozone continuing to be so apparent.
- What of Scotland? If I was in Nicola Sturgeon’s position I would do what she is doing and say what she is saying: (i) She has a duty and mandate to look again at independence from the UK (ii) Scotland may not ever need to leave the EU even if the rest of the UK does (iii) Scotland has the economic strength to go it alone and can decide what currency to employ at a later date. However, my view is that the only really smart tactical way forward is to simply say (amongst a lot of peripheral noise) that she will await the outcome of the renegotiations between the UK and EU and then let the people of Scotland decide what they want, if it is appropriate at that time. Otherwise her risks are principally that: (i) the EU does not let Scotland stay or join (ii) the UK does not allow Scotland to use Sterling or have the Bank of England as lender of last resort and all financial support stops without an EU back-up plan (iii) Scottish people recognise that Scotland is not capable of financial independence and has to do an embarrassing climb down – by which time the rest of the UK will be very tired of the threats and Scotland runs the risk of a reversal of the referendum vote ie do the UK still want Scotland (unlikely but fun to speculate!).
Moorfield Real estate Investment Strategy:
- We have looked at every exiting investment and every new opportunity and amended the business plan for each. Our already conservative approach to gearing will continue.
- We will be progressing with some of the new opportunities but with different prices and structures.
- Our economic outlook has become less positive and hence we are materially more cautious.
- We intend to be patient with our un-invested capital and look for stressed vendors.
- Our focus remains on Alternative real estate sectors but we will be looking to Traditional real estate sectors again if the discount to pre-Brexit pricing is sufficient to reflect both Brexit and the maturity of the economic and real estate cycle.