The biggest sadness of Brexit is that it is reasonable to assume that the UK will quickly enter a period of economic recession, the key reason why we believed the outcome would be different from what has materialised.
It is, in effect, likely to be the first ever “DIY recession”, as George Osborne prophetically called it.
So what does this mean for you and your investments? Is it all bad? Let’s have a look at what is likely to happen to the main asset class.
#1 Bonds: good in the short term
Bonds are the one asset class that could benefit from Brexit.
That’s because if the UK does look like it is likely to enter a recession, the Bank of England is likely to cut interest rates or even restart quantitative easing.
And when interest rates go down, bond values go up.
In fact, in the first days following Brexit, interest rates have already fallen.
There are three catches.
First, the bonds of riskier corporate issuers have now become riskier, because they are less resilient to economic difficulties.
Second, a weaker pound could drive up inflation, eating into interest rate returns.
#2 Stocks: bad
Brexit is bad news for UK stocks on a number of fronts:
- It signals to markets that the UK, which for the past couple of decades has been pro-business, is capable of the deliberate economic self-harm more commonly seen in less stable emerging markets.
- Uncertainty, squabbling and bad news are going to hang over the economy next few years, further eroding investor trust.
- Exporters lose an open market of 500 million relatively wealthy consumers. That includes the exporters of services – in particular the financial sector.
- A weaker pound and the loss of jobs in sectors related to exports will then erode consumer spending, affecting even businesses that have nothing to do with the EU.
- To the extent that Brexit could trigger a crisis in the EU itself, not only UK stocks, but also European ones, would suffer. The worst-case scenario is that Brexit, together with the weak growth and high asset prices across the world, trigger a global crisis.
But remember, not all stocks are alike: companies that are listed in London but have truly global businesses, UK companies that rely on exports but who have a greater potential market in Emerging Markets than the EU, and UK companies that sell goods to the internal market with very stable demand, are less likely to be affected than most.
For example, Brits aren’t likely to stop buying at Sainsbury’s while texting on their Vodafone’s.
#3 Property: mixed
In short, Brits will still need a place to live.
However, they are less likely to be willing to pay for some of the most expensive real-estate in the world in London if the jobs dry up there.
So our recommendation to look at secondary cities with better value for money still stands.
Of course, they are not immune to a recession.
Scotland, whose First Minister has stated she will seek to keep it in the EU, could now be an interesting market.
#4 Currencies: how sterling is Sterling?
The Pound has dropped from around $1.50 to $1.30 in a few days, and whether it rebounds or continues falling will depend on how serious the issues faced in the next few years turn out to be.
In principle, as long as the UK is a strong financial centre and its monetary policy continues to be credible, Sterling should continue to be a reserve currency, no matter its politics, just like the Swiss Franc.
On the other hand, if London ceases to be the main European financial capital, it is natural to imagine that the Pound will permanently lose importance too.
On the other hand, to the extent that Brexit is seen as a blow to Europe, the Euro is also likely to suffer.
But if the fear of Eurozone fragmentation dies down and large parts of the financial industry do move from London to Paris or Frankfurt, the Euro could eventually strengthen as it becomes a more important reserve currency.
The short term vs the long term
In the short term, the news is bad for most kinds of UK-linked investments.
The main formal mechanism for exiting the EU – so-called Article 50 – could take months to be triggered and then result in leaving only two years after that.
During that time, you can expect a daily barrage of mixed messages, controversy and political jockeying which will sap confidence.
On the other hand, that does mean these two years could be the time to snap up bargains.
Look at it this way: because of the fall in Sterling, UK property is now about 15% cheaper for international buyers than it was a few days ago, even if prices in Pounds are stable.
Also, in the long term, there is the chance that Brexiteers could prove the establishment wrong.
Some imagine that a Britain independent of the EU would seek to maintain its global economic relevance by making bold trade agreements with a wide range of countries and adopting a hyper-liberal economic approach, becoming more akin to Switzerland or even the Asian trading economies of Hong Kong and Singapore.
In short, the next couple of years could be turbulent for most UK investments, but for bargain hunters, now could be a once-in-a-lifetime opportunity.