Global Investment Strategy

GIS July 5 (Avoid Concentration Risk)

Date: 2016-07-04 - Prepared by: The GISI

Rudy Giuliani, New York City's former mayor, has a saying: "Know what you believe.” How we interpret BrExit—its global implications and its consequences on Britain—depends, to a great extent, on our values and beliefs. If we “know what we believe,” then our interpretation should be relatively simple.

BrExit will not be “walked back” (as the US Secretary, John Kerry, has argued); the UK parliament will not overrule the result and there won’t be a second referendum because at least two-thirds of the British public are against it.

The vote to leave the EU has set in motion a succession of events that has its own logic and unstoppable momentum. As France’s ex-president—Nicolas Sarkozy—likes to say, “when the centripetal forces are in action, you cannot master them.” Which trade model (Norway, Switzerland, Canada….) Britain eventually irons out with the rest of the EU remains unclear.

It is clear, however, what Britain intends to do outside the EU. A few days ago, the incumbent British government revealed a robust post-BrExit plan to boost the UK economy. It includes reducing the corporate tax rate to 15%, down from 20% now; seeking new bilateral trade deals, and; an extended visit to China later this year to attract addition foreign investments.

The current political turmoil in Britain is much more telling and globally relevant than most realize. Almost all political systems around the world are malfunctioning. Britain’s political meltdown is taking place because the British had the courage to do something about the entrenched bureaucracy instead of simply moaning and crying in their suits. The turbulent undercurrents of the British political system are no worse than those of most other countries, they are simply more visible/transparent.

Alan Greenspan recently stated that BrExit was a big mistake, that Scotland and Northern Ireland will almost certainly separate, and that Britain will be worse off. Later on, in the same discussion, he argued that Eurozone is a deeply flawed project, that Northern and Southern Europe are very different, and that “Greece should be kicked out because it is a toxic liability.” 

But if the Eurozone is indeed as flawed as Greenspan thinks it is, what difference does it make whether Britain is in or out of the EU?

Nearly 40% of voters in Scotland and 44% of voters in Northern Ireland chose to “Leave the EU,” therefore, we should not underestimate how much the lethargic EU bureaucracy is despised throughout Europe. Popular discontent with European institutions and policies has been rising for many years.

Whether or not Scotland or Northern Ireland choose to separate from the UK will depend largely on the next British government. That is, if the new government can negotiate and compromise with an open mind, empathy, and determination, it is very likely that both Scotland and Northern Ireland will remain within the United Kingdom.

Mervyn King, the former Governor of the Bank of England, has recently said I don’t think BrExit will have a significant bearing on the future of London, much of its activities have to do with aspects well outside clearing of euros… the legal system in Britain is the one that people around the world want to come and use….I don’t think we can expect anything other than a period of uncertainty between now and September.”

BrExit may have been the catalyst of the EU reshuffle, but it is definitely not the cause. BrExit has created a lot of uncertainty, and a great deal now depends on the intellectual ability, competence and ideology of the next British government. The same is true for the EU. Governments are now at the spotlight and have to work more effectively. It is not clear that they are capable.

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