June 20, 2016

I recently came across some economic commentary from Manulife Investments.  Manulife has been one of the managers in our Model Portfolios for some years now and have produced excellent results for us and our clients.  So when they comment on important issues, we certainly consider what they have to say.  The comments appeared in their May, 2016 Economic Note, and reflected the views of Ms. Megan Greene, who is the Chief Economist at Manulife Asset Management. 

The commentary I am referring to was with respect to Brexit.  We previously had Grexit, the Scottish referendum and now the U.K. referendum to determine whether the U.K will remain in the European Union (EU).  Obviously, they are not in the Eurozone and have never adopted the Euro as their currency.  That fact may make things somewhat less complicated should the Leave side prevail, but there will certainly be implications resulting from an exit, and to fully “detach” from the EU will take quite a long time.

From what I have read recently on this issue, the consensus is that an exit would not be a positive for the U.K., but may be far less damaging to Europe than many think.  As the referendum is soon upon us, I thought it might be useful to summarize some of the points made in the commentary, as I think the piece was a very good review of what  is going on and what is at stake.

We are now in the final leg of Brexit campaigning.  With the murder of MP Jo Cox, campaigning has been halted entirely.  Whether it will resume before the vote is unclear, but one thing that occurs to me is that the murder of a high profile Stay proponent may sway public opinion, at least to some extent, away from the Leave camp.  With polls indicating the results are too close to call, and U.K bookmakers saying the Stay vote will prevail, but not by much, this incident could change the result, and to at least some extent, the future of the EU.

So first of all, let’s have a look at the players in this match.  The Stay side, led by Mr. Cameron, seems to have been weaker than most imagined when this debate began.  While most originally thought the referendum idea would result in a strongly united Conservative party that has not been the way things have been going.  Half a dozen senior government ministers have pledged allegiance to the Leave side, as has former London mayor Boris Johnson who, according to the polls, is the most popular politician in the U.K.

Most feel that in the event of a Leave victory, Mr. Cameron would have no choice but to resign.  That would have the unfortunate effect of the U.K. having to begin treaty negotiations with the EU during the transitional period during which the Prime Minister’s successor would be named.

Brexit would likely have quite a negative impact on the City of London, which has become one of, if not THE most importantly financial centres in the world.  As well, the Pound Sterling would depreciate, and that may well boost inflation.  Mr. Carney and the Bank of England would then have to focus on either inflation or economic growth, which would seem to me to be the perfect definition of being between a rock and a hard place.

But it is likely that any negative effects of Brexit would not be limited to the U.K.  It may well also de-stabilize the rest of the EU.  The Union already is facing a number of problems.  The concern of some is that if one member pulls out, others may well follow.  It is difficult to really get a handle on what the repercussions might be for Europe, let alone for Canada.

The only thing that is absolutely certain in all of this is that markets hate uncertainty.  So, until all the votes are in, there is likely to be high volatility in equity, credit and currency markets.  Everything now points to a very close vote.  And like other similar votes we have seen in the past, the closer the outcome the less likely that the “issue” will go away.  So it is likely that regardless of the outcome on June 23rd, the issue will not be completely resolved.
Howard Goodman
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.

This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation).  The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.

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