No bongs but no tears – it could be okay

I read the news today.

Bong – the UK leaves the EU.

Today is Independence Day or Isolation Day depending on your persuasion. My family were totally split with half voting remain and half to leave. We have never fallen out over it, but respected each other’s views. Who was right and who was wrong? It is far too early to let Big Ben bong in celebration.

What do we know? We certainly have more certainty than we did three months ago, so at least we go into the next period of uncertainty with some certainty. Crikey, that makes Donald Rumsfeld sound like a genius. But that is exactly where we are.

On balance I am inclined to be positive. I have no doubt we will all be experts In Canada Plus and Irkutsk Minus before the end of the year as negotiating trade agreements dominates the nightly news. These agreements will be complex and extremely political, which means they will take a long time. However I have a sneaking suspicion that tariff-free trade may be achieved in many sectors through interim agreements where it makes sense to both sides.

It is in no country’s interests to create trade imbalances when the world economy is looking quite fragile. I suspect difficult decisions in sectors such as agriculture and fisheries will be fudged and left on the ‘to be continued’ shelf gathering dust for years.

What makes me think this? When I visited the US last November, meeting 20 companies in a week, I was struck by how important the UK market is in its own right. The route to market for US companies in the UK is relatively simple when compared to the continent – despite the appearance of alignment (a very ‘of the moment’ word ), different languages, tastes, cultures, laws and taxes remain.

The size of the consumer market in the UK is large enough to warrant investment. Admittedly it may miss out on larger tickets where distribution could have been made directly into the EU. But was that really going to come to the UK? The geography and cost of labour was always an issue compared to some other countries in central and southern Europe. Indeed if the new government uses its new freedom to subsidise industry in the North through tax breaks (level up – another phrase of the moment) we might see considerable growth.

Another point raised during my meeting with a large truck manufacturer on the American west coast was that countries in the EU seemed to be governed by rules set by the regulators which are implemented by the politicians while in the US it was the opposite. Food for thought?

I do feel there is room for confidence. I think the “gloomsters” may have over-egged the pessimism, and I’ve been backing this in my funds since the beginning of December with a significant increase in UK exposure.

We do have a tendency to beat ourselves up in these islands, probably due to the weather. But actually we are a rather attractive investment, so maybe more overseas CEOs and asset allocators will swipe right and get into a relationship with the UK, long term of course not just for one night.


David Coombs
Head of Multi-Asset Investments

David will be speaking at our upcoming Annual Scotsman Investment conference. To book your free ticket, click here.