Ten years after Brexit…

At Tricio we look at charts in order to gauge investor sentiment and behaviour.

It has been 10 years since the UK’s EU referendum result. Things are not as bad as feared as Europe has not made the UK a pariah state and zombies are not roaming around the British landscape (apologies to '28 Years Later'...). But, UK economic activity has suffered relative to where it ‘could have been’. CNBC has a nice series of charts and explanations that sum up what has happened over the last 10 years.

My personal view on Brexit (I was not a UK citizen then so could not vote in the referendum) was mixed. My City colleagues, clients and friends were lockstep in thinking that ‘Remain’ would get the most votes. My big landowner neighbours and their friends were super confident that the ‘Remain’ vote would prevail. I remember attending a country house dinner party where it seemed that the guests had never heard of reasons to vote ‘Leave’, they were astounded that anyone would vote for such a clear ‘economic self-harm’ result.

However my smaller farm friends were all ‘Leave’ backers, and my ‘non-City’ contacts were all ‘Leave’ voters as well (mostly to get more money for the NHS, as that narrative had caught their attention). A former colleague had a research job at a big factory in the UK and summed it up – management was sure ‘Remain’ would win, the factory workers were all set to vote ‘Leave’. I had mixed feelings – voters needed to express their fears and frustrations but there was a lot of misinformation floating about.

 Many polls were saying ‘close, but remain may win’ but it seems that a lot of voters were ‘shy’ about saying that they would vote ‘Leave’. The fall in GBP/USD on referendum eve and the next day from probes above $1.50 to near $1.32 was a tumble of over -11% - in one day! This means that any US investor in GBP assets saw an -11% loss in one day, just on the back of this vote.

I had client visits planned for the day after the referendum and gave them my view. I had only worked at US research firms and banks in London before setting up my own shop so I had a pretty good view as to why US firms liked the UK as a place to set up their European HQ’s. The same language, the rule of law, stable political system, ability to sell and invest in the EU from a UK presence were all great for US, and other foreign investors putting money and resources to work in the UK.

The -11% drop in GBP/USD on the day after the referendum underlined the effect of uncertainty in what might happen next as far as foreign investors in the UK were concerned. My view then, which we held at Tricio until late 2022 when it finally happened, was that Cable would make new all-time lows.

The long-term chart above is worth considering. GBP used to have bouts of strength above $1.70 in the past and the occasional foray above $2.00. Activity below $1.50 was seen as being on the soft side of the long-term range, with sub-$1.35 levels not really held for long.

The new post-EU referendum reality is that GBP seems to be a basement dwelling currency vs. the USD. In other words, it has traded to new all-time lows since the referendum and has not rallied in a sustained manner above levels that were the ‘bottom of the range’ since the mid-1980’s.

Does this matter? Economists will point to the risks to inflation from a soft FX rate, potentially higher borrowing costs and less investment if the market views the currency as being liable to lose further ground. In general a very soft FX rate (and soft trend) can be a bit of a ‘circling the drain’ problem for bonds and the economy, which is why we love looking at currency markets for clues on sentiment and flow.

Since the Liz Truss driven all-time low in Cable in 2022 near $1.0360 though we have favoured a GBP recovery story. The problem is that the top of the range near $1.42/$1.44 is seen as being a cap on GBP. What will it take to break higher? Quite possibly some sort of great news that would lift economic growth/productivity sentiment. Closer ties to the EU which would make it easier for firms to make it a ‘no  brainer’ to set up shop in the UK in order to do business in the EU would probably see Cable push up to $1.50 and then $1.60 and higher. Until then, Cable bulls ‘wait and hope’.

Gerry Celaya, Chief Strategist