Michael Hanson
Politics, Reality Check

One Simple Investors’ Trick for Navigating Brexit

By, 07/01/2016
Ratings2043.683824

There has been plenty of Brexit fallout. Breaking news seems to hit by the minute: The day after the vote, Prime Minister David Cameron resigns! Monday, Labour head Jeremy Corbyn was struck by a decisive no confidence vote … and then he refused to step down! Thursday, the ostensible frontrunner to be the next PM, Boris Johnson, bowed out of the race after multiple, scathing criticisms! It’s high drama, but we’d advise paying less attention to the bluster and look instead for real fundamental developments. To that end, Spain held an election Sunday that in our view speaks volumes more about what will happen next with the EU, and in stark contrast to all the sensationalism out there.

As we noted in depth here, euroskeptic support didn’t surge in Sunday’s vote—former PM Mariano Rajoy’s People’s Party picked up 14 seats. Importantly, that implies, just a few days removed from Brexit, a nation like Spain isn’t going to fall like a “domino” and directly demand its own referendum. Gridlock prevailed, as did the pan-EU status quo. Both the PP and center-left PSOE are traditionally status-quo parties within Spain, taking turns running the government since 1982 (virtually all of Spain’s history of democracy). Even with still relatively high unemployment and political scandals that eroded support for the PP and PSOE lately, newer, outsider parties like Podemos and Cuidadanos couldn’t capitalize.

So far, short-term sentiment and market pricing have imbibed heavily in all the fear-driven “what if,” “domino effects” the Brexit could one day bring. But the truth is, at this moment, what we have is a large economy voting to eventually leave a trade union within a large economic area. That’s it. Everything else is speculation and short-term hand-wringing, and in the most general sense the global economy is not a lot different today than it was last week. The Spanish election result is a hard piece of fundamental data arguing against all the “what if” fear. Markets are bouncing the last couple days, but it’s impossible to say whether that marks the end of Brexit fears. Maybe turmoil goes on for days more, or even weeks.

For an investor, politics are all about what is really, tangibly done, not what is said. Sure, there are idealists out there, but the vast majority of politicians—on all sides—are opportunists, posturing themselves within the context of events to maximize the likelihood of advancing themselves and their agenda. Perhaps that’s redundant: Their agenda often is to advance themselves. Yes, it’s a cynic’s view, but political cynicism is imperative when it comes to investments.

So here is the simple trick I promised you: Focusing solely on what is done, and not what is said in politics, can save you a million headaches, and a lot of money.

From here, expect the political jawboning to go on and on. Here’s a good example:

Merkel Tells Cameron Before EU Summit: Don’t Delude Yourself

Now, why would the Chancellor of Germany—publically—have such harsh words for Britain’s Prime Minister? (And note the irony that Cameron will be gone by the time real negotiations happen anyhow.) Look at the structure and the incentives, forget the talk. Think back a few years to the eurozone’s problem of bailing out Greece (repeatedly):

Greek Debt Crisis: Germany Flexes Its Muscles in Talks With Bailout Ultimatum

Back then, Germany talked tough, but relented every time. Politically, German leaders knew they couldn’t appear as pushovers to their constituents back home, but otherwise were compelled to keep Greece in the monetary union, as many were convinced it was key for stability at the time.

Say one thing, but ultimately do the thing that the structure dictates. That’s how economics and politics often intersect. It will likely be the same with Brexit. EU leaders will talk tough to Britain to save face and discourage other members contemplating referendum votes, but both sides have very high incentive to keep trade open and smooth. The thing to watch from here is who the new leadership in the UK will be. Will it be a coalition aggressively pursuing Brexit and severed ties? Or will it be a government (as many Tories were in the first place) more sympathetic to pan-Europeanism? The team of diplomats and negotiators at the helm will matter a lot. Within many of those barely decipherable proceedings could be the seeds of unforeseen problems, or maybe great solutions. Only time will tell.

And time is the key factor here. Brexit is no longer a phenomenon of 2016. With the clock not even started yet on the two-year exiting process, at the very fastest it’s a late 2018 issue. By that time, the markets will have digested and considered developments—and likely long since moved on.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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