As fund managers it is our job to prepare for everything but Friday’s events were a shock to me. Whilst preparing for the possibility that Britain would vote to leave the European Union, my gut feel was that it wouldn’t happen. A lot of people would threaten to leave, sure. They’ll tell a pollster they have had enough of technocrats ruining their lives, but faced with the economic uncertainty of departure I thought they would stick with the status quo on polling day.
I also love everything about the world the Brits voted against.
London is one of my favourite cities. A melting pot of culture, language, food and nightlife unrivalled in the world. It’s a place that makes me feel extremely fortunate about the generation I have grown up in and the opportunities that have been available to me, and slightly jealous of what the British had that I didn’t. Imagine being able to freely study and work in Paris, Madrid or Berlin?
It is hard for me to imagine why a country’s people would want to shut themselves off from that.
The reason I can’t fathom it, though, is because I am one of the lucky ones. For a small percentage of the global population, well-educated and with the right skill set, the first decades off this century have provided wonderful careers and unprecedented opportunity. For many, perhaps the majority based on Friday’s voting, they feel completely left behind and isolated by the changes taking place.
In a Bloomberg interview the week before the Brexit poll, US President Barack Obama presciently summed up these concerns:
And this is another area where sometimes I find myself arguing with my friends in the business community. The issue is not resentment or class warfare or that somehow we want to level everybody down rather than lift everybody up. The issue is that, if in fact automation and globalization do have a tendency to create vast wealth and opportunity for a very small, highly skilled set of people and have a tendency to create a larger and larger group of folks who feel redundant in the economy, and if you don’t pay attention to that, then people will rightly resist. They will understandably say, “I am not getting a good deal here.”
Leaving the European Union is not going to fix their problems, of course. It seems highly likely that leaving the EU will hit the economy in the short-term and meaningfully reduce long-term growth in the UK. That will mean higher unemployment and lower wages. It is a protest vote, pure and simple.
And unless we pay more than lip service to the unequal distribution of benefits, unless those of us enjoying the fruits of the modern economy are prepared to find ways to share more of it with everyone else, we are going to see a lot more rebellions. That won’t be a good outcome for anyone.
Hi Steve,
Your response to Brexit reminds me of the reported shocked response of Alan Moss (yes, that’s the one – ex CEO of Macquarie, adviser to the Anchorage private equity mob that made a killing out of Dick Smith, and newly appointed Reserve Bank governor) when he heard that teachers were only on salaries of $60-$70K pa. He had no idea as he pocketed his millions every year.
If everyone looks at the rationale for Brexit purely in economic terms (and certainly that is the way most of the media and other commentariat are reporting it) and those who voted for the exit as a bunch of ignorant, poorly educated, predominantly old, working class folk who feel threatened with globalisation etc (a more brutal summary of Obama’s mentality you provided in the quote) then I think they are being foolish and unwilling to accept the democratic ‘rightness’ of what the British people have done.
Good old George Orwell would have clearly understood the issues. I commend the British people for being prepared to stand up and retain their democratic right to control their own country rather than a bunch of powerful bureaucrats in Brussels.
This is a freedom thing not just economics and I suggest the UK will be a stronger country economically and socially in the medium to longer term because of this decision.
Have a look at a great short video on the Brexit vote by Spiked Online – very helpful to get a better perspective.
Can I make one practical suggestion on ways fund managers can set the example to the ‘supposedly large majority of folk who do not share in the wealth of the 21st century’ – have in the back of your minds the ordinary teacher or mechanic or retail worker who has possibly just $100K to $200K invested with you as their total savings for retirement. That way you will hopefully handle it with care and not treat it as just ‘game money’ to be used to play the market. Do you think the board and management of Dick Smith or Anchorage, or perhaps of the recently disallowed IPO Guvera, view the money they invest this way. I would suggest not. They see it as a ticket to making more money for themselves and oftentimes ignore those who actually bear the losses.
I appreciate Forager are not like this and endeavours to expose such shenanigans but it is worth reconsidering the mentality behind many fund managers and other players in the financial markets (including the large professional advisory firms) who need to be more conscious of the costs the little shareholder (teacher, mechanic, retail worker etc) suffers when they do their analysis and make their ‘plays’. These people are too busy teaching and ‘mechanicing’ and serving customers in shops to do the detailed analysis and they rely upon the integrity and honesty of the fund managers.
One thing they do understand is that it is great to be free and to be able to exercise their democratic right to vote and they know when they are being diddled.
Well put Brett. I agree with everything you say. Brexit was a vote for freedom so I wasn’t surprised with the outcome. Having met Steve on a number of occasions and having read most of what he has written I feel that money invested with Forager is in good hands. Although ‘return’ only comes with ‘risk’. Anyone not comfortable with that fact should use term deposits at the bank.
As usual, excellent commentary from the Forager team.
I do wonder though whether the effects will be as drastic as that suggested. Surely Europe would be cutting off their nose to spite their face were future negotiations to be bogged down in petty disputes which disrupted trade between the UK and the Euro zone. However, it may be an issue were the EU send a ‘message’ such as that they continue to punish the Greeks with. Perhaps I am too optimistic.
Further, I think that the whole debate was poorly managed from the beginning – on both sides and from within and outside the UK. That the sentiment to leave was obviously so manifest should have been obvious (anything above 30-40% should have sent signals that something was amiss). As the author has indicated, when an economic model serves the interests of the few ahead of the many it is inevitable that something has to give.
This whole debate could have been a valuable opportunity to debate how the EU should adapt and change to what are undeniable differences to its originating environment. That the issues which people voiced represented, at least obliquely, real problems with the model. Instead, it was bogged down in squabbles and boondongles of spurious value, which better leadership should have overcome.
Isn’t it a little glib to write off 17m voters as “a protest vote pure and simple”?
Sure, for some it was just that, and they now have huge cognitive dissonance over their decision, but for many Brits it is about being able to remove from office the people that make the laws of the country if you are unhappy with them. Australia has the chance to do this every 3 years!
Alas, this is not a choice for the 28 members of the EU, whose home affairs and judicial system has over the past few decades been increasingly controlled by Brussels.
I’d like to hope that the Brits are still the canniest negotiators on the planet and that the EU has more to lose by playing hardball.
It wouldn’t surprise me if Article 50 wasn’t invoked for a considerable period of time to allow the establishment to line up their ducks so to speak and get the best possible deal, or even, unlikely as it seems, stay in.
While I think Steve has explained a large subset of the Leave voting cohort, I don’t think the 52% were all downtrodden victims of globalisation. Like Steve, I love London and consider myself extraordinarily lucky to be a winner in an uneven world. I don’t know for sure, but if I was British I probably would have leaned towards the Leave side.
It seems to me that the British (as a generalisation, of course) view their ‘ideal EU’ as a free trade bloc, rather than a superstate. Many in continental Europe (and I’m talking about the ‘ruling class’ rather than necessarily the populace), in contrast, view it as a superstate – full economic and political union – and that’s largely how it’s set up. Britons were never willingly going to vote for deeper integration, so the only means to get there were largely undemocratic. Once those two opposing and incompatible views of Europe’s future are obvious, might as well part ways now rather than later.
The main question for the rest of Europe now is whether they want to be part of that superstate. And if they do, if Europe as an entity overrides individual nations, then it’s well past time to get cracking and take care of those places where, for example, youth unemployment sits at 25%++. You can’t have a superstate of economic and political union designed mainly to maximise the advantages of Germans and Frenchmen. Alternatively, ditch the Euro currency, recognise the primacy of nation over continent, redesign the system as a free trade bloc only and gut the political hegemony in Brussels. My guess is that the no-man’s land in between is fragile and will, given time, break apart.
I think you have summarised the real/key issues well Gareth. The more dogmatic and assertive the comments from the EU Commission, the more likely the breakup of the political EU and the more likely a free trade bloc I reckon. I would say that is what is happening now.
Osborne has done much to right the UK economic ship since the GFC.
It would be interesting to see some comparatives between the main European countries in terms of corporate economic performance. I tend to think that would be a better indicator of future directions and dare I say investment opportunities for the Forager International Fund using the above as the background drivers. My gut feel is that Germany and the UK would be up near the top of the pack.
The biggest divide, between the remain and leave vote was age. Over 80% of 65 plus year old’s voted and they voted in the majority to leave. Only one quarter of the under 30’s voted, but the majority voted to remain. Clearly Britain, like Australia has a generational divide.
One could argue that the young British only have themselves to blame, for not getting out and voting.
Clearly, Britain and the British people will be the big losers from this vote, but it is their right to make that decision.
Peter.
Let me correct these figures 36% of 25 and under voted. My point still remains the young have only themselves to blame for not voting.
It’s apparently an estimate, nobody actually recorded that data although there is probably truth to it – http://www.newstatesman.com/politics/economy/2016/06/are-conservatives-getting-ready-learn-love-eea
To suggest that it is “highly likely that leaving the EU will hit the economy in the short-term and meaningfully reduce long-term growth in the UK” seems to be an overly confident statement in the face of highly complex scenario with no historical precedent.
The reference/link to the Economist article to support the above statement is bizarre given the article presents both sides of the argument and concludes, acknowledging the uncertainty: “A fair conclusion might be that the economic consequences of Brexit may be negative but not that large.”
Hi Jason, it is obviously just my opinion but everything I have read suggests the UK’s membership of the EU has been a massive economic success story. This is from memory and obviously impossible to isolate individual factors – perhaps it was all due to the Iron Lady – but UK GDP per person has gone from 70% of the average EU to 120% since 1970 and access to the market has made the economy more efficient and productive. It is obviously far from perfect, I have pointed that out many times in the past, but negotiating enough free trade agreements to offset what they currently have is going to take decades.
And the short-term seems pretty obvious to me. Every business and person in the country is going to immediately tighten belt straps, my guess is you will see that show up in things like retail sales immediately.
I don’t think you need to run for the hills. They will eventually sort this out and the UK will be ok, but I think it’s dangerous to pretend everything is going to go on as it was.
I think to isolate the economic consequences of Brexit from the political and social/cultural is unhelpful. Surely the stability (on most of these counts) of countries such as Germany, Holland, UK, Scandinavian countries, Switzerland, Austria makes them much better areas for value investing. N.B. I have excluded France (a nation in denial with its high taxes, unrealistic regulations, and socialist leanings including unrealistic labour laws), and other obvious high risk contenders for any investments.
The political and social stability that the UK has, and the freedom now to plot its own path rather than being dictated to by Brussels, is the very reason why the economic success will follow. To put it another way would you invest in comparable companies in the UK (out of the EU) or in , lets say, Greece or Spain or France (all in the EU)?
Yes, I agree.
Your reasons for the choice possibly reveal why the UK’s leaving the EU is a good thing.
This is the article I was looking for
https://next.ft.com/content/202a60c0-cfd8-11e5-831d-09f7778e7377
I own quite a few French small caps (< $500 m) and actually think it is a fertile area for value investors. Many of these have large family ownership, reasonable management compensation and a good yield. I'd spend a lot more time here, but don't speak any French at all and Google Translate can get a bit frustrating.
It is exactly the same sort of discontent that is fuelling the rise and rise of Donald Adolf Trump on the other side of the Atlantic.
Government is full of dysfunctions, but two of the biggest are 1. the focus on GDP rather than GDP per capita, and 2. prioritising foreign relations at the expense of their own citizenry.
Having a dumb immigration policy epitomises both of these shortcomings, just as a smart approach to immigration can be hugely beneficial.
Britain’s immigration system was far from perfect, but having a z-grade media that emphasised its shortcomings on a daily basis for decades was really all that the ‘leave’ campaign ever needed to have a real shot at upsetting the apple cart. QED.
Can I recommend Nigel Farage’s speech at the EU Emergency Summit
https://www.youtube.com/watch?v=ayojl7Op37A
He’s certainly no shrinking violet and calls a spade a spade. A sort of breath of fresh air in political conversations these days.