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When a Referendum becomes a Neverendum?

20 Jun 2016

Justin Urquhart Stewart, Head of Corporate Development

Whatever way the vote leans, the UK population may well face a situation stemming from a result that is too close for comfort and so sits uneasily with a big percentage of voters. This could cause the debate to continue to rage and possibly prompt a second vote.

When a Referendum becomes a Neverendum?

Well it is finally here. Possibly the most irresponsible of political decisions of recent times in my personal view - the EU Referendum. It's not that I don't believe in democracy…I do. But I also believe in elected representatives being expected to carry out their job, namely to take the big decisions that are going to be complicated and multifaceted. They are provided with all the necessary technical advice and support in order to make a carefully considered decision on our behalf. If we don't like them, we can, of course, throw them out at the next election. While I do appreciate that the damage may have already have been done by then, my biggest concern is that such a complicated issue as our EU membership has been brought down to populist politicians spouting often illogical hyperbole. The situation is as much to serve their own ego rather than their cause. Is this decision really going to come down to "It's the Sun what done it!" or some similar colloquial phrase?

 

Let us be clear, whatever the decision, the economy will still carry on and the UK will still exist - at least for the time being. However, successful economies run on confidence, which to a great extent is built on momentum, and thus any interference in this momentum will effect both confidence and growth, especially in the short term. We are still in a somewhat fragile post-financial crash environment, and our economy still needs to be carefully nurtured like a small fire, and not squandered recklessly by letting it be blown out by strong, chilling winds. The recent comments from Mr Carney, although criticised by the Brexiters, certainly highlight this risk.

We are still in a somewhat fragile post-financial crash environment, and our economy still needs to be carefully nurtured like a small fire, and not squandered recklessly by letting it be blown out by strong, chilling winds. 

 

Personally I fear for the Union, as our combined national strengths has been mutually beneficial since the 18th Century. As for the Province of Ulster, who can tell, but that recovering region needs careful support and should not suffer from the results of the political means and ends meted out by those with other agendas in Westminister.  

 

This whole affair has become astonishingly devisive, and I suspect the bad blood being spilt will not end with the vote. I fear this referendum will, in all likelihood, become a Neverendum. Not only because the losing side will be feeling very raw, but also because the political power struggle in the Houses of Parliament could make effective government almost impossible.

 

This is almost the stuff of a Jeffrey Archer novel: a party in power riven down the middle; the leader destined to leave with or without his assent; would-be leaders circling like predators; and already some wounded aspirants yelping in pain as they see their opportunities fade (Osborne here I think). Add to this an opposition with a leader by popular vote but unloved by his elected members, and a third party reduced to a taxi membership. In effect, this could leave the only united and effective party in London as the Scottish Nationalists! You really could not have either predicted any of this or made it up.

So in all of this what do we do as investors? Well as we have been doing in our portfolios, trying to minimise our Sterling exposure and keeping as defensive a position as possible - and of course that doesn't mean that you rush into the traditionally safe areas of the bond market, which to many of us now is looking increasingly toxic. German Bunds have already been negative for a while and, for the moment at least, UK 10 year gilts are hovering at just over 1%.

As I am writing the polls are leaning towards the Brexiters, however the mutter from the gutter at the bookies is still pointing the other way. It is, I fear, likely to be a close call that again may just lead to further frustration, all the while detracting from that vital need for confidence in our economy. Why is that so vital? Well, it is vital for inward investment. We were ranked third in the world last year but now many decisions are on hold.  It is vital for the larger property transactions. Barely any have taken plane in London since February. It is vital for corporate investment, again much of which has been on hold. And it is vital for our debt purchases and funding our deficit. A small rise in the yield we have to pay could wipe out any EU exit dividend in one keystroke as interest payments rise from the current £36 billion to the £46 billion they were just four years ago.

To me the most telling argument, but one that does not translate over here very much, was from a Berliner (and not a doughnut as per President Kennedy) who said that the most important issue for them was very clear. That we have not had a major European conflagration for 70 years. Our track record over the centuries frankly makes that a minor miracle. Peace in our time? Well maybe peace for a much longer time. It has made us all wealthier, if not fussier.

* * *

And finally… This has now almost become a tradition. If you have an international competition, you have to have some strange creature forecasting the outcome. Following the example set by Paul the Octopus, Watson the sea-lion hopes his nose for winners will bring him international fame—and a few extra fish—as he predicts the outcomes of the games taking place in France for the UEFA Euro 2016 championship.

Weighing in at a sprightly 350 kg (772 lb), the psychic, who resides in a zoo in the eastern French town of Amneville, accurately forecast France's passage to the quarter-finals of the 2014 World Cup, calling each game right until the French were knocked out 1-0 by Germany.

He signals his choice by picking up one of three ice-boxes bearing the flags of the rival teams and a "draw" sign. His zoo keeper, Pablo Joury, hopes that Watson will be a worthy successor to the German cephalopod, who accurately predicted Germany's 2010 World Cup run and became a global celebrity before dying a few months later.

If his winning streak lasts, Watson could have a long career. He turned 15 on 1 June which is just middle-aged for a sea-lion.

However the question for our British "home teams" is whether we will last longer in the competition than we last in the EU? By this time next week we could be out of everything!

Pass the claret.

Have a good week.

Justin Urquhart Stewart
Co-Founder
Seven Investment Management

Justin Urquhart Stewart is one of the most recognisable and trusted market commentators on television, radio and in the press. Originally trained as a lawyer, he has observed the Investment industry for 30 years whilst in corporate banking and stockbroking, and has developed a unique understanding of the market’s roles and benefits for the private investor.

This article represents a personal and light-hearted view from 7IM, and is based on current financial news and events around the world.  Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision.

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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