Posted on: 10 March 2016
Looking through the headlines so far this year, you’d be forgiven for thinking the world was slipping headlong into another 2008-style financial crisis. China, the trouble with oil, the worsening of the migrant crisis, political instability in Europe and the US – when looking through the prism of the news, it would seem there’s nothing but uncertainty out there. And the markets hate uncertainty.
The topic of the moment is of course, Brexit and the ‘will we, won’t we’ referendum that’s planned for June. When Boris Johnson – finally – confirmed on which side of the fence he stood, sterling took a dive and hundreds of points were wiped off the FTSE. The other political hot potato du jour is the US elections and the burgeoning possibility that Donald Trump wins the Republican nomination to run for President of the United States of America.
For a betting man, the odds on Britain being out of the UK by the end of the year, Boris comfortably ensconced at number ten and Donald Trump succeeding Obama as the most powerful man in the western world are considerably lower than they would have been this time last year. All of this political turbulence, particularly with Brexit, has led to a degree of volatility in the markets. Sterling fell to below $1.40 in the week after Britain announced the date for the referendum as 23 June.
The comforting thing about markets, however, is that they largely respond to facts, as opposed to reacting to emotion and hyperbole. They are rational and they will always focus on the probability. Although the media always seeks out the controversial angle and pinpoints the worst-case scenario, it’s not a good source of accurate information. Bad headlines sell newspapers but they don’t necessarily convey the ‘in all likelihood’ scenarios. These events – although they have dominated the headlines for the last few months – remain high impact, low probability events.
Bookmakers’ odds – which in the past decade have proved markedly more reliable gauges of public sentiment than opinion polls (just look at the Scottish referendum) – show only a roughly 30% chance that Britain will leave the EU. When people put money where their mouth is, they tend to say what they really think – and betting exchanges provide a venue for groups of punters to assess the probability of events.
Senior figures are also now throwing their weight behind the debate – Mark Carney, Governor of the Bank of England, rather controversially in some pro-Brexit conservatives’ opinions, recently weighed in to the argument, warning a Government select committee that sterling and the UK’s economic performance would probably suffer if Britons voted to leave the EU.
Although sterling has made the headlines recently with its reaction to the consternation around Brexit, its falling value is part of a much longer-term trend, which we saw a lot last year. It relates to a number of factors including the stronger dollar, our own current account deficit, the weakness of our main trading partner (the European Union) and our own domestic economic recovery. One would hope we won’t see sterling drop much further in the near term, but we expected all of these factors to continue to weigh on sterling in 2016.
Current betting odds have Trump winning the US election pegged at a similar level to the likelihood that Brexit will happen – around 30%. So realistically, and although the media would have you believe otherwise, the UK remaining in the EU and President Hilary Clinton are far more likely outcomes. That’s not to say that big events couldn’t change this. A European crisis of some form, or late entrants into the Presidential race could change the end result. But at the moment, the situation appears far more predictable than the headlines would have you believe. Perception versus reality is very different and the markets are fully aware of that.
At Duncan Lawrie, our approach is a rational, measured ‘wait and see’ approach. Given the current economic and political climate, we don’t feel it’s necessary to make any major asset allocation changes to our client portfolios or house view at this moment in time. Our message to investors is don’t take too much notice of the headlines and whatever you do, don’t panic.
All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.