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Holly's Blog: Bloody Brexit!

11 July, 2017

I sat at my desk this morning to write a blog about the financial impact of the latest Brexit Brouhaha. The trouble is, with any article or blog, you can quickly slide into trotting out received wisdoms without truly thinking about what you are saying...

Often we resort to copying what the FT says. Making like their very clever Gillian Tett. Without thinking about how you would explain your opinion with clarity to a 10-year-old. (My acid test for whether I truly understand something.)

And I realised that I couldn’t. I tried to explain things to an 8-year and a 10-year-old last night and quickly gave up and had a glass of wine instead. I have lost track of what the hell is actually going on.

In a way I am still able to comment because I know enough about financial markets to know that they are as driven by sentiment, opinion and fear as fact. Probably more so.

So what impact is sentiment having?

Watching the price and performance of sterling is actually like watching the global vote on the economic outlook for Britain. And yesterday it was certainly a Craig Revel-Horwood kind of score* as sterling fell by 2%. The world watched (presumably slack-jawed in amazement) as a series of megalomaniacs played out their games in Westminster.

Shares were also punished as any short-term certainty flew out of the window. The Royal Bank of Scotland’s shares have fallen by over 11% in a week; Persimmon, the FTSE 100 housebuilder, is down by 9%; Barclays and The Royal Mail by 7% and Burberry by 3%.

What lies ahead?

If we lived in a textbook, making a call on the outcome of Brexit should define an investment strategy. For example, an orderly Brexit should see sterling rally. Inflation will fall because all our imported stuff will therefore cost less; businesses and consumers will spend more as confidence returns; the Bank of England will put up interest rates so things don’t overheat; and smaller UK companies will do comparatively well while the Big Boys in the FTSE100 will do worse, because those foreign earnings brought home will be worth less in £ terms.

Conversely, if you think we’ll see chaos, sterling will crash and burn and the logical conclusion would be the above happening in reverse.

But that’s all kind of A-Level economics stuff. In the real world, things don’t tend to obey the rules. There is a very complex series of multiple levers all being simultaneously pulled in different directions, and fundamentally no-one knows what on earth is going on! So the only thing for certain is that we should buckle in for more volatility ahead as this unfortunate circus plays out.

*For those intellectually superior beings who resist trash telly, this can be translated as a culturally bereft person’s way of saying ‘low score’.