Tag Archives: Brexit

the fiduciary rule; the UK election

June 9, 2017 By in Current Market Thoughts, Uncategorized Tags: , , , , , , Leave a comment

advisers as fiduciaries

The fiduciary rule for retirement assets issued by the Labor Department goes into effect today, despite intense lobbying against it by the brokerage industry.

The rule requires financial advisers involved with retirement assets–with the notable exception of the 403b pension assets of government workers–to put their clients’ interest ahead of their own in dispensing investment advice.

In essence, this means that the financial adviser will no longer be permitted to recommend high-cost products with poor performance records to clients simply because they pay a high commission or that the broker gets an “educational” weekend for two at a beach resort for doing so.

The conceptual defense (such as it is) for such practices, which are still allowed for non-retirement assets, by the way, is that while the client is still not well off, he’s better off than if he had no advice at all.

No wonder Millennials are willing to take a chance on robo advice.

the British election

The British prime minister, Theresa May, called the election held yesterday with the intention of increasing her party’s four-seat majority in Parliament in advance of the first Brexit talks with the rest of the EU.

With one seat not yet decided, the Conservatives have lost 12 seats instead, according to the Financial Times.

As exit polls came out overnight predicting this unfavorable result, both Asian stocks with interests in the UK and sterling weakened.

Interestingly, as I’m writing this an hour before the US open, both sterling and the FTSE 100 are up slightly.  S&P 500 futures, which had also dipped slightly in Asian trading as the UK news broke, are trading two points higher this morning.

To me as an outsider, it looks like UK citizens are having serious second thoughts about Brexit (politicians in Scotland advocating it’s breaking with the rest of the UK lost, as well).  My point, though, is that except in extreme circumstances–like when Republican opposition torpedoed a proposed economic rescue plan in early 2009 and the S&P dropped 7%–politics make little day-to-day difference to stocks.

tallying up the cost of Brexit

April 20, 2017 By in Brexit, Shaping a portfolio for 2017: Europe, the UK, Uncategorized Tags: , , , , , Leave a comment

How good is the UK, the part of the EU most American investors know best, as a way to participate in potential economic strength in Europe over the coming 12 months?

Probably not good at all.  Here’s why:

–since the Brexit vote last June, sterling has depreciated by 13+% against the US dollar and 8+% against the euro.  While the loss of national wealth in Japan through depreciation dwarfs what has happened in the UK, the blow to holders of sterling-based assets is still immense.

Depreciation lowers the UK standard of living and reduces the purchasing power of residents by raising the cost of imported goods.  While one might argue that the fall in sterling is in the past–and while the consumer will be in trouble benefits to export-oriented firms through lower costs are still to come–this may not be the case here.  More in point #3.

–there’s some evidence that UK residents, realizing last June that prices would soon begin to rise, did a lot of extra consuming before/while firms were marking up their wares.  If so, the UK economy could be in for a significant slowdown over the coming months, both because consumers are now poorer and because they’ve already used up a chunk of their budgets through anticipatory buying.

–much of the appeal of the UK as a destination for export-oriented manufacturing comes from its position as the large foreigner-friendly country in the EU, from which multinationals could reach into the rest of the union.  That’s no longer the case.  An article from yesterday’s Financial Times is titled ” Brussels starts to freeze Britain out of EU contracts.”  Its basis is an EU government memo, which, as the FT reads it, advises staff to:

–avoid considering the UK for any new business dealings where contracts may extend beyond the two year deadline for Brexit

–cancel existing contracts with UK parties that extend beyond the Brexit deadline

–urge UK-based companies to relocate to continental Europe, presumably if they want favorable consideration for new business.

It seems to me that the EU leaked this memo to the FT to get the widest possible dissemination of its new not-so-friendly-to-the-UK policies.  It implies that the post-Brexit business slowdown in the UK will start immediately, not in two years.

One set of potential winners:  UK-based multinationals that do little or no business with the EU.  These, like ARM Holdings, are also potential takeover targets–although it’s questionable if the UK will permit further acquisitions by foreigners.

 

“hard” Brexit, not “soft”

October 14, 2016 By in Brexit, Uncategorized Tags: , , , , , , Leave a comment

Ever since the Leavers overwhelmed the Remain faction in the UK’s Brexit vote, observers have been wondering how the UK is going to effect its break with the EU   …and how complete the breach with continental Europe will be.

The two main approaches were dubbed soft, meaning that negotiations would be held at a leisurely pace, the break would come eventually–but not soon–and that the UK would retain as many of the privileges of EU membership will shedding as many obligations as possible.

Article 50 of the Lisbon Treaty lays out the process for a country to withdraw from the EU.  It provides that a state that wishes to leave sets the process in motion by invoking Article 50. That starts a two-year clock running, at the end of which the separation occurs.  Since two years is a relatively short period in diplomatic time, especially to arrange complex future trade agreements, conventional wisdom has been that a country like the UK would begin negotiations first and only trigger Article 50 when the negotiating finish line was in sight. Taking this path would be the more economically sensible.  It would also be a clear sign that soft is the ultimate goal.

The alternative would be “hard,” meaning basically getting out of Dodge as fast as possible.  Why do so when collateral economic damage would result?    …because other political considerations, like halting immigration from the rest of the EU, have a higher priority.

 

Over the past week or so, Prime Minister Theresa May has been signalling that Brexit will not be put on the back burner, and that, in consequence, the UK government is opting for the “hard” road.  She will invoke Article 50 by next March, at the latest.  And she has packed her negotiating committee with the most anti-EU people she can find.

This decision has a number of consequences:

–Scotland, where two-thirds of voters cast their ballots to Remain in the EU, is reviving its own referendum to withdraw from the UK and enter the EU as a sovereign country itself

–putting itself under time pressure by effectively starting a two-and-a-half-year clock running, the UK has revealed its sense of urgency.  That may have lost it negotiating leverage

–half of the UK’s exports go to the rest of the EU.  Time constraints may see it leaving the EU in early 2019 without trading agreements with countries where its major customers reside–meaning export sales may fall off a cliff

–similarly, it becomes less likely that bankers based in London can retain their current unfettered access to clients in other EU countries.  This suggests that banks may begin to shift operations to the Continent

–sterling will continue to slide.  For portfolio investors like you and me, this has perhaps the most important near-term implications.  There’s no need now, nor in the near future, to change from favoring London-traded stocks whose assets and earnings are outside the UK.  Better still if the firms’ borrowings and SG&A expenses are in sterling.

 

 

 

the slow-motion disappearing act of the British pound

October 5, 2016 By in Brexit, Uncategorized Tags: , , , , Leave a comment

Brexit

Just prior to the Brexit vote in June, at a point when sentiment had temporarily swung in favor of Britain remaining in the EU,  the British pound reached a high of about 1£ = $1.48.  Yesterday the post-vote slide reached a 31-year low of 1£ = $1.27, 14% lower.

What makes the $1.27 level significant isn’t just the continuing fall in national wealth induced by the Brexit vote.  It’s also that the UK has now slipped behind France for the title of second-largest economy in the EU.

The cause is the gradual working out of the detailed consequences of something that was, or should have been, well known in general terms before the Brexit vote–that however emotionally satisfying the Brexit vote might have been, there are potentially very large economic costs to the UK from leaving the EU.

They come in two forms:

–London is the financial center of the EU, and as such has tons of banking jobs which may well shift out of the country

–because it is more open to foreign companies than continental Europe, many multinationals have chosen the UK as the home base for their EU operations.  Much of that presence–and the associated jobs–may well be leaving now, as well.

US parallels

Two parallels can be drawn between the UK and the US from Brexit.

The first is that the vote in favor of Brexit–since generally regretted in the UK–was driven by an older, rural constituency that felt left out of EU-generated prosperity.  There is also an anti-immigrant element in the pro-Brexit camp, though not so overtly racist, I think, than among Trump supporters here.

The second is that in stock market terms the Brexit vote has not been as bad as one might have feared.  The currency has since fallen by about 12%.  The large-cap FTSE 100 has risen by 10% or so, however, offsetting most of that decline.  Many multinationals are actually up in US$ terms.

However, although the same forces driving voters in the UK may well be motivating those in the US, I don’t think the idea that the S&P 500 reaction to a Trump presidency in the US would be similar to the post-Brexit FTSE holds water.

That’s because the two stock markets have very different structures.  The UK is a small country with an outsized stock market, dominated (about 3/4 of the market cap) by multinationals headquartered in Britain but doing the vast majority of their business elsewhere.  For most of those, a fall in sterling has lowered administrative costs significantly but has had very little negative effect on revenues.  For multinationals with their debt in sterling, the advantage is magnified.  In additions, because multinationals give access to a stream of hard-currency revenue, they also serve as a modest form of capital flight.

Half the US stock market, in contrast, is made up of purely domestic companies, with another quarter doing business in nations whose currencies are linked to the dollar.  So the safe haven effect would be much smaller.  In addition, all of his other negatives aside, simply given Mr. Trump’s loony notions about foreign trade, the economic damage he might do is considerably greater.

 

 

Brexit, sterling and InterContinental Hotels Group (LN:IHG)

August 3, 2016 By in Brexit, currency effects, Lodging, Uncategorized Tags: , , , , , , , 1 Comment

Early indicators after the UK vote to “Leave” the EU are already showing the country is dipping into recession.  Nevertheless, large-cap stocks in the UK have held up surprisingly well.

This can clearly be seen in the results just announced yesterday by IHG.  The fear of markets before Brexit about hotels had been that the post-recession cyclical upsurge in vacationing had just about run its course–and that, as a result, hotel profits were just about to peak/had already peaked.  But the figures from IHG were good and the stock rose by about 3% on the news.

To see how this can be, it’s important to note    that the post-Brexit decline in the fortunes of the UK has been expressed almost entirely in a 10%+ decline in the British currency.  This is an unexpected boon for British-based multinationals.

As Richard Solomons, the CEO of IHG, put it in yesterday’s report to shareholders:

“Note that whilst the UK comprises around 5% of our group revenues,

approximately 50% of our gross central overhead and

40% of Europe regional overhead are in sterling.

At 30 June 2016 exchange rates, approximately 70% of our debt is denominated in sterling.”

All of these figures are now 10% less in purchasing power terms than they were pre-Brexit.  Without any price changes, revenues will be 0.5% lower in dollar terms than they would have been.  But overheads will be down by much more.  In addition, the dollar value of the company’s debt is sliced by about $128 million.

This situation has two positive effects in the minds of UK investors:

–profits will likely be higher than anticipated, making the stock more attractive, and

–to the extent that a company like IHG, which has the lion’s share of revenues outside the UK, is affected by Brexit, the influence is likely to be positive.  This means that it can act as a way for British residents to preserve the purchasing power of their savings.