As an individual I have always been an observer of other people and since I became a ‘world watcher’ sitting in the gutter back in West Ham in the 1960s there has never been a political situation as weird, difficult and uncertain as we have today.
The vote last Thursday to leave the EU has severe ramifications: the vote has split our country and our people. Not only did it split us almost half and half (17million v 16 million voters), we now know from analysing the results that we have a deep division between sub sets of our country: the rich and the poor, the old and the young, the educated and the not, and never has the term ‘north versus south divide’ been more poignant or relevant. The vote has caused the downfall of our Prime Minister and the split of the Conservative party and most likely the downfall of the leader of the political opposition as well.
We cannot underestimate the seriousness of all that and I watch it avidly hour by hour unfolding on my TV in complete bewilderment.
And yet as I sat there this morning I realised that actually nothing had changed for me personally: my cat still wanted feeding, I still needed to get my teenager out of bed for work, cook lunch for my house guests, send my son down the corner shop for forgotten potatoes, and pay my gas bill.
It is easy to forget that the massive worldwide ‘macro’ economic and political thing that is unfolding actually has very little impact or immediate affect on our individual ‘micro’, individual worlds. I still need to support my family, and curiously each of my three (now adult) children will be living back home with me by August because none of them have anywhere else to live.
Of course we need to be aware of what BREXIT means but more importantly we need to be aware that whatever happens, whatever changes, whatever political turmoil there may be; at the end of the day how we get through that is due to our own personal action and the amount of responsibility we each take for our own lives and those of the people we love.
There will be some people who become paralysed with indecision and sit like rabbits in the head lights of the oncoming juggernaut and get flattened: and there will be those who dust themselves off, take responsibility, make decisions, take action and move forward. Only you can decide which one you will be:
The choice is yours.
27th June 2016
What’s going to happen?
The honest answer is that we don’t know but I want to cover here the major topics that are arising and given my best personal view on what I think will happen next.
The UK has been a member of the EU since 1st January 1973. There are currently 28 members and the only country ever to leave was Greenland who voted to leave in 1982 and it took until 1985 for their exit to be formalised – so a 3 year exit timescale is one precedent that has already been set.
There is another, different precedent from the Netherlands. Their populace actually voted NOT to ratify the country’s entrance into the EU in 2005, but that vote was not a constitutional vote and was ignored by the government of the day but it’s one indicator that the Dutch people are not fans of the EU and would most likely vote leave if they had the same referendum we’ve just had.
As we now know, the legalities to leave are that we invoke the Article 50 of the Lisbon Treaty – which is like the exchange of contracts in our terms - and then we have 2 years from that date to negotiate final terms and complete our exit.
As for timings we already know that David Cameron isn’t going to start the clock running himself and he will leave that to the new incumbent Prime Minister to do. Therefore, it’s unlikely that our two-year notice period will not start until the end of this year or possibly the beginning of the next.
After that we have the two-year negotiation period and even then it won’t all be finalised within that time and my best estimate is that we won’t fully be out of Europe until at least 2019 or possibly 2020.
One strange thought! The okey cokey?
2020: That’s a long time – and we almost certainly will have a general election in this country before we’re fully out of the EU so it’s completely possible that the next general election may be fought on this membership issue and the incoming political party get a mandate to hold another referendum and we then vote to remain – so we could do an about turn part way through the exit process.
I say this is a possibility as I’ve been watching the feedback and many people seem to be genuinely shocked that we’re out and there’s a growing number of BRegretters who now say that they would change their vote if the referendum were held again today.
And if you look on the government poll:
you will see over three million people have already signed a petition to hold a second referendum – that’s 10% of all people who voted last week – and that’s a massive number.
There are broadly FOUR groups and opinions to merge in the negotiation phase:
- In the EU there will be a group of people who want to ‘hurt’ the UK and shove us out of the door immediately to reduce the impact of what has happened, and
- There will be a group of people in the EU who want desperately to hold onto the UK as long as possible.
- In the UK there are a group of MPs led most likely by a new Prime Minister (who has to be a pro BREXIT person doesn’t it?) who want us out as quickly as possible, but
- Out of the 650 MPs, approximately 500 of them are ‘remain’ people and any legislation or agreement has to go through Parliament, so they could stall and negate and only allow a very diluted, and slow exit position to go through our legal and parliamentary system
Added to that we know that we don’t have one clear opinion in this country and it will be an almost impossible task to find any one route or view or position that suits all people.
So four groups with extreme positions and these positions have to be consolidated into one exit position: that’s going to take some considerable time.
The star has left the party!
My final comment about the EU itself is that clearly the UK has started a bit of a riot. We are the 5th largest economy in the world, have an increasing GDP and are very powerful historically and politically and we want out. Effectively the star of the show has now left the EU party. That may start a ball rolling for other countries and we have already seen calls for a Brexit style referendum from at least 6 other EU participating countries.
I suspect we will see at least two other countries vote to leave the EU in the next year or so and that leaves the EU in a weakened position. Of course, it won’t be the weaker countries that vote to leave; sadly it will be the stronger economies and that degrades and dilutes the whole remaining EU membership.
I certainly wouldn’t want to be Angela Merkel this week!
THE ECONOMIC AND MONEY STUFF
Firstly we know that what any economy or any trading market hates is UNCERTAINTY! And for sure were going have a lot of uncertainty in the next few months but I suspect that most people will just get back on with their lives shortly and increasingly we will see a return to normal.
The overall view – and particularly the view of the outside world not connected to the EU - is that the UK economy is going to weaken.
That may be true or it may not and as no-one can exactly predict the future we will have to wait and see. I suspect there will be some ups and some downs (especially in the short term) and potentially overall there won’t be much change on where we expected to be
Mark Carney, the Governor of the Bank of England was very quick to his feet on Friday morning to re-assure everyone that although there was likely to be a bit or turmoil, they were ready with £250 billion emergency money to steady any rocking financial ship, and that does appear to have calmed some fears.
The market likes it when the Bank of England takes responsibility and says they will pay up: it creates more certainty.
However, to put this into a reality context: nobody expects – even at this stage – that the UK economy will shrink – they just think the rate of growth will slow. Before Thursday we expected our GDP (Gross Domestic Product) to grow by a little below 2% in the next year: those forecasts have now been downgraded to, for instance, 0.7% growth (HSBC) and 0.2% (HIS Global Insight).
The Moodys thing
One overall measure of what an economy looks like is the external credit rating of a country as a whole. There are several rating agencies but if we look at the three big ones: Standard & Poor's credit rating for the United Kingdom as of Friday 24th June stands at AAA with negative outlook. Moody's credit rating for the United Kingdom was last set at Aa1 with negative outlook and finally Fitch has us at AA+ and stable.
What is perhaps more helpful to look at is the Trading Economics credit rating (TE Rating) which scores the credit worthiness of a country between 100 (riskless) and 0 (likely to default). As at today the UK is 95: so a prime economy which is highly rated.
And to put that into context the USA today sits at 97, France at 90 and Italy at 60.
Sterling has taken a nose dive. It dropped in February when the Brexit vote was first announced, it recovered when confidence that we would remain strengthened and then it plummeted when we voted out.
This is a sign that the outside world doesn’t like it and wants us IN rather than OUT.
So as the pound weakens the cost of buying stuff outside of the UK in other currencies increases.
Simply if the £ is worth €1.5 then clearly we can buy stuff in Europe worth €1.50.
If the £ falls and weakens to say £1 = €1.2 then when we go abroad we can buy less with our £1.
If you’re going on holiday in the next few months, and you are going to buy say Euros or Dollars, the amount your pound will buy when you get abroad will be less in comparison to when we have a strong pound.
It is also likely that the actual holiday itself will be more expensive because of paying for services and hotels in another country when the pound is worth less.
If you look at the 3 month Sterling v Dollar chart below you can see that actually sterling has fallen from being worth about $1.425 in April to $1.37 on Friday so only a 5 cents change on what you can buy which isn’t huge.
Longer term though Sterling has been falling against the dollar for quite some time. Six months ago the Dollar was worth $1.49 and a year ago it was worth $1.57
Now let’s look at the £/€ chart for the last 3 months.
Clearly sterling has fallen in the last few months but again just like the £/$ the fall has been going on for a while now and the 6 months and one year £/€ figures show a downward trend in the value of the pound.
It is likely though that the exit vote will mean that the Euro takes a bit of a hit alongside Sterling so there may not be too much of a fall of Sterling against the Euro comparatively as they both fall together.
Currency movements impacts inflation and interest rates.
Interest rates are controlled by the MPC (Monetary Policy Committee) which reports to the Bank of England. They move interest rates based on several factors but for the sake of this report we will look at the two most important issues now which are Sterling and the economy.
If the current predications are right then sterling is weak and the economy will also go down.
The challenge with those two things is that they direct the MPC to make different decisions. So if the economy looks like it’s going to weaken then they put interest rates down and if sterling is going to weaken then they move interest rates up.
Let’s look at the sterling part first: we know that the UK is a net IMPORTER of stuff - so we buy more in from overseas than we trade or sell out to other countries.
So as sterling falls we have to pay more for what we buy – that creates inflation in our prices as they go up – and the MPC then usually puts up interest rates to counter that. What that does is to attract inward financial investment into the UK so we have money to deal with any deficit.
Current estimates are that inflation could go up to 3% - 4% from its current position of less than 1%.
However we already know that sterling has been on a steady slow decline over the last year or so anyway and in any case the MPC and the Bank of England are more bothered by the weakening economy.
What they will do then is to hold or even decrease interest rates so that it’s cheaper for UK businesses to borrow money and get through any difficulty.
It’s widely predicted today that interest rates will come down in the near future.
I’m personally not so sure – I suspect Mark Carney’s aim is to keep them static: we already know that he doesn’t like change and he will want to hold rates at 0.5% to help counter the impact of falling sterling. He won’t reduce rates in a hurry – but he might have to if the economy weakens.
My best guess is that we might see a fall in Base rate to 0.25% in the next 3 months.
Although the UK imports more than it exports – one of its major exports is Banking and Financial services.
The UK employs approximately 2 million people in financial services and associated professions like accountancy and law; and 500,000 more in banking directly.
Banks are by definition cautious animals and they won’t want to make any snap decisions although some banks have already commented that they want to stay in London and some have already said that they intend to move a thousand or two employees out of London.
The big issue here is whether the UK banks will retain ‘passporting’ rights or not.
What that means is that a firm authorised in a European Economic Area (EEA) state is entitled to carry on permitted financial activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services. This is known as ‘passporting’.
This will be one of the major negotiating subjects when the exit negotiation starts: the UK is likely to want to retain passporting rights or something similar: but it isn’t the end of the world in financial services terms: neither Switzerland nor the USA currently have passporting rights across the EU.
It is likely that some employment will be lost as some banks move processing partly into the EU but London will still remain one of the world’s largest banking and trading centres.
The Financial Services Compensation Scheme
This scheme is currently set at an EU wide level of £75k but before the UK joined the scheme there was a different banking guarantee scheme of up to £85k. One or other will remain in place, so saver’s money is still safe within the terms of those guarantees.
There has been a lot of talk about Trade Agreements in the run up to the vote so what happens there?
Firstly the EU leaders will meet on Tuesday 28th June and I doubt they will do anything immediately. People who do trade with other EU countries will be able to continue to do so either without any trade agreement (anybody can sell anything on the web for instance more or less to any country so we don’t need a formal trade agreement to trade or sell our goods anywhere).
In addition to that it’s likely that the UK will be given three trading options from the EU:
- Continued membership of the single market
- A generic free trade agreement
- A tariff based system under the World Trade Organisation rules
So trade won’t stop and there’s a chance it will be identical to how it is now.
Much has been written about the plummet of the UK stock market on Friday but let’s look at the evidence and last week in detail.
The FTSE started at just over 6,000 last Monday morning (20th June) and it traded up every day in the expectation of a remain vote. When the leave vote actually came in early on Friday morning that weekly rise was more or less negated as the market adjusted.
Then the market bounced back on Friday afternoon resulting in the FTSE closing at 6,138 on Friday – a 2% INCREASE on the week.
If any investment made a 2% gain in a week we would normally be screaming and shouting for joy: it staggers me that the media are allowed to report such great information in such a negative light as they did last week. That’s irresponsible journalism in my book!
Furthermore, we know that the French, German, Italian and Spanish stock markets all suffered larger losses than anything seen in the UK – an indication that the traders and investors in those countries are more ‘worried’ than those in the UK about the UK’s departure.
Most pension funds in the UK are invested mainly in shares in the stock market and the value of any individual pension is derived by the value of the fund overall (unless you’re lucky enough to have a defined benefit scheme – say one based on a final salary). If that pension fund was mainly invested in the UK stock market it probably had a good week last week (see stock market comments elsewhere)! If the fund had wider European stocks then the value of the fund would have been hit by the fall in those other European financial markets.
The Dow Jones (the US stock market) fell by 1.55% last week overall so again if your pension fund had any significant holding in US stocks, then it’s likely it had a slight dip last week.
Please note these are short term, one week, factual figures and percentages for information purposes only and are no indication of future performance!
IF however you have a personal pension that you control and invest yourself – then what you made last week is entirely up to you! I know that our lead share trader within FF made significant gains last week (including one gain of over 100% on Friday on banking stocks).
If you want to know more about that and how to do it – contact the office on the normal number.
Right let’s get onto the biggie for us: property prices and the best way to address this is to go through our standard processes and start with Take A RIDE:
A – this is actual evidence and our evidence is that the property market rises over time with little rises and falls within an overall upwards trend. It’s likely that the property prices may stagnate in 2016 and I suspect this will be partly because of a lack of confidence and certainty which means that volumes of transactions will drop.
This impacts our domestic purchasers (Dom and Dora) more than investors but nonetheless it will result in fewer transactions overall and fewer properties coming to sale and that’s frustrating for investors as it looks like we’re entering a buyer’s market
It’s always a good time to buy property when the price is low. We also know that most commentators now predict that house prices will fall in the next year by a percentage or two: The Centre for Economics and Business Research for example says that the average UK house price will fall by £2,300 by 2018.
For us it’s a simple process as long as we follow our formulas: IF there’s demand and the wash its face calculation works and the ROCI is high enough then it’s a good investment.
BUT we need to stick to the formulas and the processes: review the strategic plan and pyramid and then assess if the price is right and as long as the deal works – then it’s a good deal!
R – is our ratio which is purely an expression of the affordability of housing as it takes the average house price as a proportion of the average salary. House prices will change (see Actual evidence - and so might salaries - see employment below).
I - stands for interest rates and we have already discussed interest rate movements elsewhere but in short the expectation is that interest rates will either stay the same or fall a little over the coming months meaning that there is likely to be a reduction overall in mortgage rates.
However one note of caution here is that the Banks and Finance providers might be running a bit scared at the moment and so I assume that getting mortgages might take a little longer or be a little harder to get for a short while.
So interest rates remain low (or lower) but mortgages might be tougher – so keep your eye on the cash clock and consider other funding alternatives!
Demand and Supply. Well this won’t change significantly either way. We know that we have approaching 2 million people wanting local authority housing all over this country. Added to that we have possibly another one million of demand from people who would love their own home – if only one were available or affordable. So a total of approximately 3 million of underlying latent demand in the UK. That isn’t going to change in any major way now. Even if we refuse entry to 250,000 migrants – that still won’t dent the shortfall.
This is the one thing that can’t and won’t change and it is the one thing that constantly underpins housing prices in the UK.
Employment and economy – now we expect some changes here. We currently run at very low levels of unemployment and that can change if jobs stop being available or if the numbers in the work place change (up or down) for any reason.
Let’s look at the UK today. We have approximately 1.6 million people unemployed. Those people are based mainly outside of the south east where there is currently virtually no unemployment.
There may now be some regional changes. If we don’t take in 250,000 people from the EU next year then our work force potentially drops – meaning that there are more jobs available for those who are left. In addition, we may have some people leaving the UK and going to work in Europe but to offset that we may have some jobs that leave the UK and go into Europe also.
So some changes are expected and there will be some ups and downs but overall it isn’t predicted that there will be a major change in the workforce numbers – and it will be back to the economy to see if there is sufficient work available and sufficient pay available.
The economic future is uncertain today. Many people expect that the growth in our economy will start to slow down and consequently fewer jobs may be available so it is increasingly important that we confirm the demand for housing before we invest anywhere.
Our property strategy is always to protect ourselves and to buy some properties that generate income and some that generate chunks of capital.
It is important that we confirm demand and check all the evaluations carefully.
But the current situation does provide an opportunity.
For any potential capital strategy if we can buy a property at a lower price and then sell it at a higher price – it works! That higher price will come from work you do to enhance the value in terms of either Buff and Fluff or refurbishment – AND of course from normal market uplifts that occur as the market moves.
So for any potential capital strategy it’s very important that we check all the points of UPWARDS.
For any income strategy the value is less important than the monthly cash flow and the certainty of the tenancy. Again check demand fully: check the wash its face calculation, calculate the ROCI to you, and confirm that you are getting the highest return for the money input.
With the wash its face calculation you also have the option to include – or increase - a contingency allowance if you are of a cautious disposition.
What happens in the general marketplace is that when the market rises our normal domestic purchasers leap into the market as they have confidence in it. That increases demand and helps to maintain an upward trend in property values. When the market stagnates or even drops the domestic purchaser runs scared and decides not to buy. However because they still need to live somewhere they then RENT and so demand for our rental properties tends to rise during times of market uncertainty.
We’re entering one of those phases now so our rental strategies are now even more important than before.
We know that in the UK we have net inward migration of approximately 250,000 people per year and have done for the last decade or so. This year we expect that figure to be over 300,000 and there are two potential changes;
1. That number will decrease if the UK refuse entry to any potential migrant, and
2. It is possible that the French will refuse to control the UK border (as they currently do by stopping all potential incomers at Calais in the camps there) and we will have to re-establish borders in Kent.
Visa, passports, E111 and travel
Over time the current EU passports, and EU driving licenses will be phased out and eventually we’ll go back to a slightly different style or format. But this isn’t going to happen immediately and it’s likely that if you’re about to renew your passport in the next few months you’ll still get a red EU one so it will be about 10 -12 years before those passports are completely phased out here.
Regarding travel visas into Europe I can’t see there being much if any change. I travelled around Europe before we were members of the EU with no travel visa and I suspect that will be the same post exit.
The E111 or European Health Insurance Card currently allows any EU citizen to get ‘free’ health care wherever they are in the EU. This may stop but only when we are completely out of the EU – or it may just be replaced as part of the exit negotiations. Failing that it will be replaced by purchasing a simple travel health insurance – which many people already have.
NHS and education
The leave campaign’s claim that £350 million per week could now be directed towards the NHS and education was false. The UK still have to contribute any payment to the EU whilst any exit negotiations are taking place and so no extra money will be available to be diverted into the UK until at least 2019.
At that stage the government at the time will prepare their own budgets and allocate funds as they see fit across all areas of public expenditure – which will include the NHS and education and the military.
Subsidies and EU payments
All subsidies and payments will continue as normal and will form part of the negotiation process.
Our UK law is now intertwined with the law of the EU and many of our pieces of legislation are connected.
When the government get their negotiating and exit team together they will need to decide what to do: the extremes are:
1. They repeal every law made whilst we have been in the EU and take out any ‘Europeanisms’, or
2. They leave all the laws alone and change legislation going forward.
It is likely and sensible that they will stick with what we have and possibly change just a few areas where relevant.
In most cases the UK law is very similar if not identical to EU law and no real changes will be necessary. If we take the Mortgage Credit Directive just passed: that legislation was partly bringing the EU into line with the UK Financial Services Act and we can still adhere to that irrespective of our EU position.
There is not going to be a legal free for all and whatever rights and responsibilities we had before last Thursday, will remain.
The Financial Conduct Authority specifically has said:
"The FCA is in very close contact with the firms we supervise as well as the Treasury, the Bank of England and other UK authorities, and we are monitoring developments in the financial markets.
Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.
Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation."
This means NO CHANGE for us!
Relationship with America
I wanted to finish with America and the views of the mighty Barack Obama. When he visited the UK in May he famously said that we should stay in the EU or we would go to the back of the queue in terms of trade with the USA.
He has now come out and said that we are still very ‘special’ and has insisted the UK and Washington will remain “indispensable partners".
He said: "The people of the United Kingdom have spoken, and we respect their decision. The special relationship between the United States and the United Kingdom is enduring, and the United Kingdom's membership in Nato remains a vital cornerstone of US foreign, security and economic policy.”
Just goes to show that Barack Obama’s a big BLUFFER!
It’s going to be an interesting and exciting year ahead full of uncertainty but also full of opportunity.
I’m personally very excited about what I can do next and what I might buy. I love markets when they drop as it provides me with a better income investment opportunity than if the markets rise. And on the capital side the less I pay for any asset, the more I make when the market rises.
So I’m full of enthusiasm, excitement and optimism about the next year – it’s likely to be a bit of a roller coaster ride – so strap yourself in and LET’S GO!!!!