Brexit – looking back to go forward
Amid today’s political turbulence, it can be hard to take the long view, but turning to history can help.
On 15 April 2016, a two-month referendum campaign began; 31 months later, it feels far from over. Yet despite the torrent of Brexit news ever since, the implications of the UK’s exit can often feel remote and unfathomable. Confusion stems from ongoing disagreement over the definition of Brexit, the complexity of the issues involved (perhaps especially the Irish border) and the weight of the expected change, as the UK severs a 45-year-old association with its major economic partner in favour of a new approach. One way to begin to clear the air is to understand how we got here.
Søren Kierkegaard, the Danish philosopher, wrote that life can only be understood backwards, but must be lived forwards. Understanding what it meant for the UK to join the EU, in economic and financial terms, and what it meant for the UK to vote to leave (as opposed to actually leaving), can offer some of the longer-term perspective that is sorely needed. As in politics, so in investing: short-term approaches ultimately get found out. In this light, we believe that carefully considering the past can only help investors not fall into obvious errors in the future. Here we consider the financial and economic impacts – disputed as they are – of what are perhaps the two most important moments in modern Britain’s relationship with Europe: 1973 and 2016.
'Brentry', 1973: the impact
The UK entered the European Economic Community (EEC) hoping to revitalise a stagnant economy and lose its moniker of ‘the sick man of Europe’. Ted Heath, the prime minister, saw the European project as an opportunity for the UK "to be more efficient and more competitive in gaining more markets not only in Europe but in the rest of the world”.1
Did membership deliver on that promise? Opinion is divided. Comparatively speaking, the post-1973 growth trajectory has been positive. Professor Sir David Hendry, an economic historian, wrote in 2016: “Per capita GDP [gross domestic product] of the UK economy grew by 103%, exceeding the 97% growth of the US. Within the EU, the UK edged out Germany (99%) and clobbered France (74%).”2
Nicholas Crafts CBE, Professor of Economics and Economic History at the University of Warwick, argued that UK prosperity is around 10% higher than it would have been had the UK never joined the EEC or EU.3 He pointed to increasing economic competition and openness from membership as driving much of the change.
But others claim these trends owe more to reforms made under Margaret Thatcher. “EU policy has always been either irrelevant to European growth rates… or, like the euro, positively detrimental,” wrote Professor Alan Sked of the London School of Economics (and founder of UKIP). “The economic basket case argument doesn’t work.”4
Source: World Bank
Any competition gains may have come with a cost: Leyland Motors, once responsible for 40% of all UK car manufacturing, went bust in 1986.5 Meanwhile, the UK’s fishing industry declined rapidly – EEC exclusion zone arrangements may have been decisive.6
Yet both business and the mainstream media preferred EEC membership in the early years. In 1975, when a referendum on membership was held, a CBI survey showed that, out of 419 polled, only four company chairs favoured leaving.7 The newspapers were much the same; even the Daily Mail, Telegraph and Express favoured continued membership.
Yet while 67.5% voted to stay in back in 1975 (with 64% turnout), the numbers have been volatile ever since – and several leading newspapers have turned Eurosceptic.8 The legacy of 1973 remains a lively topic.
Referendum 2016: the impact
Two years after the referendum, the terms of the UK’s departure deal remain to be finalised, and yet many assumptions have already been priced into markets. The value of the pound (relative to other currencies) offers a snapshot of how the UK economy is rated globally; it has been the chief bellwether of how investors view Brexit developments.
In recent years, the most significant market reaction to UK-EU developments came in June 2016, when the referendum result was announced. On the eve of the referendum, a pound was worth more than $1.50 but, within a fortnight, it was worth less than $1.30.10
That suggests the immediate impact of the referendum was negative for sterling-denominated assets (although, of course, investors may have been wrong to sell).
The effect of this downgrade on equity markets was perhaps surprising, until you looked more closely. The FTSE 100, which comprises the largest companies listed in the UK, received an immediate boost the first trading day after the referendum result; the FTSE 250 also rose. The FTSE 250’s exposure to slightly smaller companies has helped it outperform the FTSE 100 over the past two decades. But the latter’s greater international exposure has reversed that trend since June 2016, when the fall of the pound made foreign earnings more valuable in sterling terms.11
But what of the economy, investment and jobs? On these scores, the headline data have been less clear-cut. Unemployment in the UK has continued to slide to historic lows since the Brexit referendum, with its pace of improvement broadly unchanged, suggesting that the vote has not harmed the jobs market – or could technically have helped it.12
Trends for new business and business investment have been less positive. Total foreign investment in the UK fell by 90% in 2017, a far steeper fall than for the EU; a bumper year for the UK in 2016 is not sufficient to explain a fall of that scale.13 Moreover, Companies House figures show that, in the 12 months to March 2018 – the first full post-referendum tax year – company registrations dropped 3.8% and company dissolutions rose 12.4%.14 It was the first time either trend had worsened since the financial crisis.
Finally, economic growth in the years immediately before and after the referendum deserves consideration, even if the reasons behind shifts are rarely simple. In 2013, annual GDP growth began to crest above 2%, brushing up to around 3% in 2015/16.15 In the year of the referendum, it slipped to below 2% and has since fallen to little more than 1%; the eurozone growth rate rose in 2017 and the US rate has been rising since late 2015.16 This implies some referendum fallout, but only on a limited scale. Besides, the Bank of England’s willingness to raise interest rates points to a relatively healthy economy.
The experiences of 1973 and 2016 could suggest that there is also likely to be an economic and financial impact from the UK leaving the EU, but there is grist for both sides of the debate. While economists such as Nicholas Crafts might say the data imply there will be a cost to leaving the EU, others such as Alan Sked might see advantages for the UK in having a cheaper currency. What is certain is that we do not know how the UK economy will fare outside the EU – and how great an impact different types of exit deal might have.
For investors, it is worth remembering that the FTSE All Share Index rose through the 1970s and has risen through the 2010s, and that its constituent companies have continued to pay out dividends over the long term.17 Of course, major political changes can adversely affect individual companies. However, in most cases, the companies themselves are largely to blame, whether due to poor management, a lack of innovation, mismanaged finances, or failure to respond to technological changes.
While fund managers need to bear political developments in mind, investing in quality companies for the long term will always be the best insurance policy against any political shocks that are felt along the way. Achieving that requires not merely good analysis and judgment, but an aptitude for not allowing investment decisions to be ruled by emotions. Whatever the cost of Brexit, history suggests that short-term fear is likely to cost investors far more.
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2 Institute for New Economic Thinking (www.inet.ox.ac.uk/news/Brexit), accessed 18 October 2018
7 Andrew Marr, ‘A History of Modern Britain’, p.330
9 Andrew Marr, ‘A History of Modern Britain’, p.330
10 xe.com, accessed 17 October 2018
11 In 2007-15, 76% of earnings by FTSE 100 companies came from outside the UK, whereas these comprised only 51% of earnings by FTSE 250 companies, according to figures from Schroders: see https://bit.ly/2OuqfAB
12 Trading Economics, accessed 16 October 2018
15 Trading Economics, accessed 16 October 2018
16 Trading Economics, accessed 16 October 2018
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