image June 2016 image June 2016

BREXIT initial thoughts

Given the dislocation in financial markets following today’s historic “Brexit” vote, we thought we would share our immediate thoughts. Like many, the result has surprised us. Whilst we’ve frequently noted the ongoing polarisation of politics broadly in the Western World (the rise of Trump, etc.) and simplistically put it down to differential economic outcomes, from an investor’s perspective this would now seem to matter. The financial market pre-poll consensus of a comfortable win by the “Remain” camp now seems naively out of touch with the “average” voter’s view.

The implications for Europe are potentially significant with continuing political uncertainty around the meaning of the European Union. An immediate impact on business confidence is likely with decision making in both the UK and Europe likely to stall. While monetary authorities have pronounced themselves as “standing ready” in the event of a Brexit, currency, credit and equity market volatility is likely to continue for some time. Although there are parallels with the GFC, we characterise the unfolding events as a political crisis rather than a financial crisis, though the potential for economic spill-over is very real.

Antipodes’ portfolios for much of the past year have adopted relatively conservative positioning, including exposure to gold and short positions on some of the more extreme examples of equity market speculation. Market dislocation events often provide great opportunities to acquire resilient businesses at distressed prices, and we’re well placed to take advantage of these opportunities.

The UK will take several years to properly unplug itself from the European Union system, with all care now taken to ensure limited economic fallout from the decision. And whilst the UK runs a significant current account deficit, the UK and Europe’s economic interdependencies remain too great for ether party to give up on the other. After a period of adjustment, the UK will come through this event, with a significantly weaker currency taking much of the pain.