A plan for the post-Brexit mess

The UK has voted to leave the EU.  This is a game-changer and in what follows I aim to give you guidance on how to protect yourself from the impact.

I view Friday 24 June as the equivalent of a 7.0 Richter scale earthquake for our economy.  No single day which lies ahead will shake us so much, but expect plenty of aftershocks.  Expect casualties.  The aim of what follows is to ensure that you don’t become a casualty!

There may not be a recession, let’s hope not.  But the second quarter was already weak, one factor being the number of large companies which publicly announced they were deferring investment and recruitment until after the vote.  Some of those have already moved to announce they are continuing to defer, so anyone who tells you this vote has had no impact on the real economy is factually inaccurate.  It is prudent to develop plans to combat recession, let’s hope they don’t need to be implemented.

Facts

1.    The pound has fallen to a level against the dollar last seen in 1985.
2.    On Friday 24 June the pound reached its 2016 high and 2016 low against the dollar within six hours.  I have never seen this, not even in 1992, in over 30 years following the markets.  Extreme volatility.
3.    The UK has had its credit rating cut more savagely than any AAA rating has ever been cut.
4.    The Prime Minister has resigned.
5.    The Leader of the Opposition has lost a vote of no confidence.
6.    Scotland has a credible and competent Government which wants to leave the United Kingdom.
7.    Talks are under way with the Republic of Ireland to see if Northern Ireland can join that country.
8.    China devalued its currency on 27 June, thus resuming its trade war with the USA.  Peace had been in place between them since a deal struck in August 2015.
9.    European stock markets fell more than the UK and Italy announced some fiscal measures.
10.    A number of businesses which have deferred investment and recruitment over recent months have made announcements confirming further deferrals.
11.    The Brexit team has attempted to distance itself from most of the claims it made in the run up to the vote, including those on the sides of buses and on posters.
12.    Airline Easyjet issued a profits warning, on the basis that it expects several million UK holidaymakers to have been priced out of this summer’s foreign holiday market.
13.    Upmarket estate agent Foxtons issued a profits warning, saying it sees increasing weakness in London residential property.
14.    Banks, housebuilding and construction shares have been heavily sold down.

My opinions about all of this

1.    This is the worst financial and political crisis faced by our country since the Northern Rock collapsed in 2007.  For sure it is not as bad as that crisis, and in my view it will not get as bad.
2.    If I was to pick a comparable crisis, I would go for the Far East crisis of 1998.  This had a limited UK impact and most UK citizens will not have noticed it, but it was grim in the Far East.  Well this time most Far East citizens won’t much notice things but it will be grim for us.
3.    The London property market was teetering on the brink, in my view it will now see a full-scale rout.  This would have happened anyway and overall it is a good thing.  The Brexit vote will increase the size of the drop, and the impact of falling prices on other regions of the country.
4.    Imports and goods priced in dollars – such as fuel, food and energy – will be more expensive and will stay more expensive for the foreseeable future.
5.    Banks are going to be jittery.  They have much stronger balance sheets than in 2007 and won’t need to beg us for funds.  But they won’t be keen to lend to marginal propositions either, though good quality borrowing proposals should still get done on reasonable terms.
6.    Exports will be cheaper in foreign currency terms so this is a good chance for British firms to sell their goods and services abroad.
7.    It will cost our country more to service its debt and sooner or later we will have a Budget which addresses this.  The longer we take to accept this the nastier the Budget will have to be.

Some sectors will be much better off than others.

In my base case scenario, UK GDP will fall 2 to 3% in the next 12 months.  This assumes this issue is fairly limited in its geographical impact with minimal contagion in the rest of the world.  Even with this assumption, in my view some sectors are going to be hit very hard and some will be fine.

At the end of this review, I will outline the prospects for the three main sectors in Cumbria in detail.  But even if you don’t live here, the factors which underpin my analysis of our sectors can be applied to those in your area too.

Action plan for small businesses

1.    Be at the front of the financing queue.  All Oaktree clients who were considering approaching external parties for funding had been told, in no uncertain terms, to get on with the job now by Tuesday 28 June.
2.    If you export abroad, great. If you get paid in pounds sterling, ask for euros or dollars!
3.    Get a foreign currency broker for large value currency deals.
4.    If you import, consider your pricing position.  Can you pass supplier price increases of 20% on to your customers?  If not you may need a cost-cutting plan or to develop new markets.
5.    If you are heavily exposed to UK property on borrowed money, consider dumping some of it now whilst prices are still reasonably high.  Accept any reasonable offers.
6.    Carefully appraise any proposed investments in either plant or staff.  Ensure you have looked into the risks and that they are worth running.

Cumbrian economy

Cumbria is a good place to look to see the impacts. We have three big sectors - tourism, nuclear and farming. Most of us voted Brexit so let's see how those sectors will be affected.

Tourism is easily the biggest gainer of any sector from Brexit, with a double whammy gain. Britain is a big tourist draw and it has just got cheaper for visitors to come. It has also got dearer for Brits to go abroad, so at the margins there will already be Brits priced out of going abroad this summer. In the base case this will increase as people lose jobs or businesses in the recession. So more visits from abroad, more staycations from Brits means tourism is a big winner.

Nuclear - pretty neutral. Energy is mostly priced in dollars, so the sector’s competitors on the grid - especially gas - will be more expensive. Nuclear is thus more attractive and will probably get better grid prices. On the other hand, decommissioning is a really easy Budget cut to make which costs no votes so most likely will be cut in an effort to plug the hole in the nation's finances. Nuclear generation benefits but decommissioning loses.

Farming - ironically many farmers voted to Leave, I wonder if they realised their sector is one of the worst affected? They are facing a double whammy in the wrong direction. Feedstocks and fertilisers are mostly either priced in dollars or based on petrochemicals which are in dollars, they have just got dearer. Nearly 80% of UK farm produce is sold to the EU, this is now a big question mark. Will prices at Carlisle Mart hold up in coming months? I somehow doubt it, so farmers in my view will most likely see a perfect storm of weakening sales prices and higher costs.

To see the impact on you personally, you just need to consider to what extent these different factors impact your own circumstances and how vulnerable you are to things like stricter bank lending criteria, lower property values, higher foreign currency costs and so on.

Wednesday 29 June 2016