The growing possibility that Britain could leave the European Union without a deal poses some tough questions for investors. Matthew Lynn proposes five strategies to see you through.
The divorce bill is still being haggled over. With every week that passes, we get closer and closer to our exit from the European Union, yet no closer to getting a deal with our former partners. There is clearly a serious possibility that we will tumble out of the EU with no agreement leading to perhaps the biggest crisis for the economy since the crash of 2008. That poses some tough questions for investors. Here are five smart strategies.
First, go long on volatility. Stockmarkets have been quiet this year. On the day the announcement is made that no deal has been reached, that is going to change. Whatever the long-term consequences, in the short-term the markets are going to hate it. Every major business organisation, and dozens of economists, will be predicting catastrophe. Expect some wild swings in the FTSE perhaps a 10% drop on the day itself.
Next, sell the pound and shift assets overseas. No one really knows what the consequences of crashing out of the EU without a deal might be. It might turn out into the full catastrophe predicted by Remainers, with lorries queuing all the way from Dover to Bromley and Waitrose running out of avocados. Or it might turn into the liberation that hardcore Brexiters dream of, with countries queuing up to sign trade deals with us. Most plausibly, there will be some losses and some gains and net-net it won't make a lot of difference. But in the first instance every global fund will be getting out of Britain and that means sterling will tank. The more money you have overseas the better.
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Thirdly, expect another blast of quantitative easing. In the wake of the referendum the Bank of England, fearing a slowdown, responded by boosting the economy with a cut in interest rates and a blast of printed cash. There is no reason it should not respond to "no deal" with another round of stimulus as well. That will help asset prices, hurt the pound, and give another boost to house prices.
Four, sell the losers. The overall impact of the EU on the British economy is exaggerated, but there is no point pretending it does not mean anything. Financial services are going to be hit, not least because the rest of Europe is determined to use Brexit as an excuse for undermining the City. The car industry, a major exporter, will struggle. So might aerospace and aviation. Those problems will fix themselves in due course, but in the short-term pain is still pain. From the banks to the car parts suppliers to the airlines, companies in those industries are going to take a hit when it becomes clear we are leaving without a deal.
Finally, buy the winners. The Brexit camp has not been very good at selling the economic benefits of getting out of the EU, so the upside has been largely ignored. That doesn't mean there isn't one. One of the big benefits of "no deal" would be getting out of the customs union that would mean escaping the tariffs the EU imposes on the rest of the world. Food would be a lot cheaper as we tap into world markets, and that will give a big boost to the supermarket and restaurant chains. Retailers will benefit as prices, despite a cheaper pound, come down especially the chains that compete fiercely on price. On top of that, we will save the money we were going to spend on the divorce bill and that will help the public finances. The companies that rely on government contracts will be helped by that.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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