Capital Group portfolio manager Mark Brett and economist Jens Søndergaard, both based in London, discuss possible implications of the Brexit vote for the U.K., the European Union and investors.
Matt Miller: It’s going to take some time for the whole Brexit debate now, and the politics of that, to play out. But there’s talk about it potentially being reversed — that a government could form, that a different referendum or a different parliamentary decision could be made — which seems like it could leave things uncertain about whether Britain is in or out for quite a long time. And public opinion could change in the months ahead.
Mark Brett: It could easily change if, for example, there’s a deep recession or if the EU were to say, in fact, “We might offer you something else.” At this stage it’s all political negotiation, so there’s a lot of grandstanding. I think, as investors, we know to be very careful with this, and we just have to be calm and wait and see and don’t rush into anything. Though I wouldn’t rule out anything, personally.
Matt Miller: One thing: If there is this prolonged period of uncertainty, it does seem that would impact business investment in the U.K.
Mark Brett: Absolutely.
Matt Miller: It’s certainly hard to imagine being enthusiastic about your next big plan to build a plant or take the next step, etc., as opposed to putting stuff on hold for a bit.
Jens Søndergaard: I think we’ll see a very sharp slowdown in economic growth over the next couple of quarters. We will see the Bank of England responding, possibly already at the next meeting in July, with one rate cut — will take the bank rate from 50 basis points to 25 — and then another rate cut in August, taking rates down to zero. Interestingly, the Bank of England, relative to other central banks, has kept bank rates higher. They have not taken rates down to zero, unlike the ECB [European Central Bank] or the Bank of Japan, so they have room to cut rates down to zero. That, to me, seems the easy decision.
The next step is whether they’ll restart quantitative easing and start buying gilts. To me that seems an obvious next step. They know how that works, they’ve tried it; their perception is probably it was a success. The question in my mind is whether they’ll do that already in August or whether they’ll wait a couple of months and see how those rate cuts filter down into the real economy and then start the quantitative easing program, possibly in November.
Mark Brett: I agree with Jens on that. And I’d say, in addition, the U.K., like the U.S., has its own central bank and its own currency, so it can do what’s right for its own country and not wait for the European Central Bank, where all the stress and strain has come from in the euro. The pound has fallen really sharply; it’s getting cheap. And as in the U.S., when the currency gets weak, given time, you get some benefits from that: You get manufacturing returning; your industry becomes competitive again; you might start to attract some capex, so long as you clarify this whole political mess.
So the U.K. does have that ability to work its way out of the crisis if you take that five- or 10-year view. I think, as an investor, it’s always important to say, “Let’s just lift my eyes to the horizon. Where could we be a decade from now?” And there is a way out of this, even though it’s a big mess at the moment.
Matt Miller: In a time like this, which is disruptive — it’s really a shock, as you both explained — there’s a tendency to focus on the downside, the potential ripple effects on the downside. Does it also present opportunities, especially for active managers like Capital Group — where we’re selective and looking at moments like this — not to just go with whatever the market is doing overall?
Mark Brett: I think you have to look through what are the things could this knock on to that we haven’t thought about? So this is essentially, in the U.K., a reaction. It’s a populist vote, because a lot of people are really angry in the U.K. Globalization has hurt them. You have a generation of folk who’ve been unemployed. They’re angry. They’re not quite sure what they’re angry with, but the first chance they got to express their anger, they went for it.
Maybe that could be a good thing. People have got a point. Maybe if it shocks the policymakers into changing the system a little bit, maybe you come out of this in better shape. The U.K. desperately needs better infrastructure. Why hasn’t there been investment in infrastructure to cope with the growth that we’ve had? Maybe that’s rose-tinted, but some of the discussions we’re having are about what could change.
Perhaps another example would be the banking question in Italy. If this kicks them into doing a bank cleanup, that’s a good thing. If it kicks the French into doing labor market reform, that would be a helpful thing. If it helps the Germans decide to spend a little bit more money, rather than save it, that might help, too. So sometimes these events give the system a kick in the right direction. We’ve got to be open to that possibility.
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