Tags: brexit | stocks | investors | threat

Brexit Uncertainty Only Adds to Global Threats to Investors, Stocks

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Wednesday, 26 December 2018 11:21 AM Current | Bio | Archive

We will need to see how the U.S. markets end the day before trying to form a serious opinion of where we could be headed for in the new year.

Besides the uncertainty created by political statements as of late in the U.S., and not by economics, one of the most important economic questions remains “what if there is no deal for Brexit?”

For now, investors could do well keeping in mind that this is what the UK must do “legally” and unless the British Parliament changes the law, the UK is legally required to do a “hard” exit from the EU on March 29, which remains the “default” scenario.

Now, I don’t think that’s going to happen. I still think we we’ll get a “negotiated” exit, but if we end up with a hard exit, of course, the UK will be very badly affected, but under such a scenario it will be not the worst affected because that would be the Republic of Ireland because that’s a small open economy that is very exposed to the UK and because of that it has less flexibility and would probably require some kind of a system or bailout from the European Union itself in the event of a hard exit and the disruption that that would cause.

Otherwise, I think the main and most immediate concern in Europe, aside from Ireland, would be about “managing liquidity” in the European financial system. Please keep in mind that 80 percent of European financial contracts are written under UK law. It has to deal with the exposure of Europe to the UK financial system.

The UK may be exiting with a hard exit but it still will be a “very large liquid financial market” and if Europe doesn’t have access to that at the same terms as we have today, that would be a very serious issue.

So, I think that raises the main concern for the European Central Bank (ECB). Apparently, they have been looking at managing that recently. I think they left it for rather late in the day for considering what they were going to do and that is going to be the main focus for the ECB for the coming weeks.

It doesn’t necessarily change the overall direction of policy because the Eurozone economy would not be overall affected as badly by a hard exit as would be the UK and Ireland, but the liquidity of the financial system is something the ECB would be needed to look at as a matter of extreme urgency. 

I think investors need to “get a sense of realism” here. The United Kingdom (UK), in the event of a hard exit, doesn’t disappear from the face of the planet. Trade becomes more difficult but it doesn’t become impossible. Financial services become more difficult but they don’t become impossible.

The financial sector has done a certain amount of planning for this. The ECB has come late to this very particular “party”, but they are catching up

So, I think that here would be a “disruption,” but it is not sure that we would get disorder.

Emerging Markets and Uncertainty

The Centre for Economics and Business Research (CEBR) stated yesterday: For the medium term, we are roughly as optimistic as we were a year ago, but suspect the route to growth will be more bumpy than we had assumed 12 months ago, adding, India would overtake Britain and France, probably in 2019, but possibly 2020, rather than in 2018 as it predicted a year ago.  For emerging nations, it will now take longer to outpace developed economies.

Britain would probably lose its place as 6th biggest economy to France in 2019 due to Brexit-related disruption, but the UK should regain the 6th place back by 2023, which is important for long-term investors, not for traders.

Interestingly, The CEBR now projects Ireland to be among the fastest growing economies in the Eurozone next year, but also said Brexit posed a big downside risk to that forecast.

Douglas McWilliams, deputy chairman of the CEBR, said with debt high and many of the structural problems that caused the great recession still in existence, a global recession could be more difficult to resolve than its predecessors. However, policymakers and governments still have enough ammunition to see the world through the next recession, Reuters explained.

In context of all the above, the CPB World Trade Monitor for October shows there are no indications the world economy is heading into a recession.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Besides the uncertainty created by political statements as of late in the U.S., and not by economics, one of the most important economic questions remains “what if there is no deal for Brexit?”
brexit, stocks, investors, threat
Wednesday, 26 December 2018 11:21 AM
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