Boris baulks boss and backs Brexit
The headlines over the weekend were dominated with the deal for Britain that David Cameron secured with Brussels and the divisions that the deal is causing, not only within his own party, but even within the cabinet. The Prime Minister believes he has secured a “special status” for Britain within the 28 country bloc and as a consequence he believes that Britain should vote to remain in the EU when faced with an in-out referendum on Thursday 23 June. Boris Johnson caused a stir yesterday as he has come out in favour of a British exit (Brexit) from the Union. He is arguably the biggest political name to do so and seemingly has one eye on replacing David Cameron as PM should the UK vote to leave the EU.
The market’s response this morning has been mixed. At the time of writing, sterling has weakened the most in a year versus USD, which seems to suggest the market has become more anxious about the prospect of Brexit, but the UK ten-year gilt has barely moved. Conversely the UK stock market is up in line with other major markets, which suggests that the market is still reasonably sanguine about the news. This is understandable given there are still four months until the referendum and, truth be told, there is little more known on the matter this week than last. Over the coming months expect the market to continue to be buffeted by pro or anti EU sentiment as it ebbs and flows in opinion polls.
The still unanswered question is what Brexit means in reality because the longer term implications for business are still unknown. Were Britain to exit then it would need to negotiate effective trading relationships with the continent to ensure Britain’s competitiveness in the region. The problem with a vote for Brexit is these sorts of issues are, by definition, unknown until the decision is made and implemented. Voting in favour of an unknown when the status quo is acceptable is therefore emotionally difficult. Swing factors such as the prevailing economic winds and the tone of news flow relating to immigration are going to be extraordinarily important in the build up to the referendum. Interestingly, in today’s Telegraph column Boris seems to imply that if we voted ‘no’ that he would use that as a platform to return to the EU for further negotiation with a view to a second referendum rather than an immediate severing of ties. If that were to be the case, the flip flopping would be extremely destabilising for Europe generally. The European Commission is in an undoubtedly difficult position. It would prefer the UK to stay as an exit raises the prospect of other abdications, but at the same time the more concessions offered to Britain the greater the EU’s status becomes undermined: as Boris noted this morning “this is the key point – the EU acquires supremacy in any field that it touches”.
While the politics surrounding the referendum is compelling, investors must remain alert during periods of uncertainty such as this for valuation opportunities that often emerge. Given the recent pressure on global stocks, any further nervousness should provide a very attractive entry point for long-term investors.