Peter's Perspective
28th June 2016 by Peter Churchouse

BREXIT: What to Watch in the Next 3 Months

The Brexit vote was a surprise to us. We were not alone.

Now we are all trying to calculate the realities of this massive event.

The problem?

Nobody has any idea how Brexit takes place… let alone the impacts on the real economy, in the U.K, Europe or elsewhere.

There is no precedent. History offers us few reliable guides.

The basic reality is that this messy divorce is going to take years to negotiate and push through the courts.

Negotiations can’t even begin until a British government invokes the relevant clauses of Article 50 of the Lisbon Treaty. That is three to four months away at the earliest. The former Prime Minster David Cameron left that for the next Conservative Party leader to clean up.

The impacts on the real economy in terms of trade flows, capital flows, people flows will not be known for years. British manufacturers can still sell their products in Europe, and Europeans likewise to the U.K. under existing rules and regulations. People can still move back and forth as they do today.

You’ll notice, I stress it’s the real economy that I’m watching here.

Financial markets? Sure, we expect ongoing volatility. We’ve taken a kicking on our U.K. positions. We expect the pound to remain under pressure, global government bonds to stay strong, the dollar to be a haven, and equities bear the brunt of the British population’s decision.

But what’s a key data point we need to watch in the U.K.?

For me, it’s actual and announced capital expenditure (capex).

Just consider it for a moment. Let’s say you’re a manufacturer of any kind (cars, steel, machinery… anything) with operations in the U.K. and that you currently sell, or plan to sell your product to the EU.

What are you going to do with those capex plans you had?

You were planning to expand that facility in the Midlands, build a new plant to service your EU customers. Well, you are probably going to think twice.

It’s Monday morning in the U.K right now. The executives of companies all over the country are sitting down as we speak to review, postpone, or even cancel the capital expenditure plans they had just a week ago.

And likewise in Europe. Companies there, at the margin, will also be concerned about their expansion plans, to the extent that they relied on sales to the U.K.

However the balance of negatives are much greater for the U.K. than they are for the rest of Europe.

Keep an eye out on capital spending, along with foreign direct investment (FDI), corporate expansion plans, and M&A involving companies operating in the U.K.

But this isn’t just about manufacturing, it’s also about services. The U.K. is a globally important provider of financial services, funds management, accounting, and legal services.

Do we think companies will be looking to expand these in the U.K. when they have no idea if they are going to be able to employ the people to build those businesses that provide such services to Europe?

Capital spending and FDI will give us some early signals as to the real economic impacts that the Brexit vote will bring.

There’s a lot of ‘noise’ at the moment, in financial markets and of course the media.

That’s totally understandable. But we have to remain focused on what really matters for the real economy… because ultimately that will guide our long-term investment decisions.

Beware of the natural impulse to invest on ‘knee-jerk’ reactions based on what you’ve heard or read.

Good investing,


P.S. Yield and safety are now more important than ever. In the upcoming edition of The Churchouse Letter we’re giving a rundown of an asset that provides us both.

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