The global markets are on pins and needles awaiting next week’s referendum on whether the United Kingdom will leave the European Union.
The vote on June 23rd has significant ramifications not only for the British. It may well set the tone for other EU nations to contemplate exiting the economic bloc. If the “Brexit” movement fails and the UK decides to remain in the EU, the markets will likely rally and could rally significantly.
Markets like the illusion of certainty
Markets like certainty (or at least the illusion of it) and a vote for the status quo would be re-assuring. Investor worries have pushed interest rates around the world to lower and lower levels. Concerned players sell risky assets to buy US, Japanese, Swiss, and German government bonds.
I find it an ultimate irony that reports of a lack of faith in governments abound yet people continue to buy government debt hand over fist. These incredibly low-interest rates are a function of slow economic growth, actions by the world’s central banks, and investor fear.
To show how extreme this is, last week’s interest rates on Swiss government debt were negative out to 30 years. Investors are so concerned about the economy and the UK political scene that they are willing to PAY the government to hold their money – for 30 years! Perhaps the Swiss case is a sign that the fear pendulum is swinging to the pessimistic extreme.
Flights from risk in many corners of the markets
We are seeing a flight from risk in many corners of the markets.
Investors are buying, without a lot of concern for valuation, investments that are believed to be “safe”.
In addition to government bonds, valuations for municipal bonds, real estate, utility stocks, consumer staples, and growth companies like Amazon all seem stretched.
If the world turns out better or even marginally better than these investors anticipate, there is a chance for massive losses in bonds and a correction in the other so-called “safe” assets. We will know a lot more Thursday night and into Friday.
My thought is that stock markets around the world will drop if the UK decides to leave the EU. The decline will not be so much about the UK. Britain is not the economic engine of the world and any differences in trade between it and the EU will affect the British.
Which EU country will be next?
What will be foremost on investors’ mind is the question of which country will be next? The entire fabric of the EU could begin to unwind.
Historically, challenging economic times have led to retrenchment and an emphasis on the home-front at the expense of a more global view.
Tariff restrictions and currency wars led to a rapid decline in global trade during the depression years of the 1930s. Governments, in an attempt to protect their home industries, instituted barriers which most economists believe prolonged the slump.
The “every man for himself” knee-jerk reaction led to poor economic policy and one could argue led to the rise of hard-line to extreme political leaders.
Hopefully, good economics will prevail this time around.
— Ian Green, Pendragon Capital Management
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.