There is much wailing and gnashing of teeth after the vote in the United Kingdom to exit the European Union. Sterling has seen its worst performance since 2008, closing around 1.33 to the dollar today in global trading. Stocks saw a dramatic selloff after the Brexit vote but have now rallied substantially on hopes for more stimulus on the Continent and the UK. Rumors that Brexit will never happen also has bolstered equity markets worldwide. Of course central banks are also doing their part to keep the markets elevated.
“There’s no doubt that central bankers are helping to underpin this market and take some of the risk out of the market,” said Quincy Krosby, a market strategist at Prudential Financial Inc., which oversees about $1.2 trillion. “This is a commitment from central banks to keep the liquidity flowing into the market, and that’s crucial, reports Bloomberg.
Predictions of gloom and doom are everywhere you look in the financial press and from the lips of politicians across the world. Even Vladimir Putin in Russia is chiming in.
“We intend to closely watch how far the talks between London and Brussels will go and what will be the consequences [of Brexit] for Europe and us. The traumatic effect of the referendum results will be felt for a long time,” Putin said at a meeting with Russian ambassadors and permanent representatives. “Let’s see how principles of democracy are being put into practice there,” he added, reported the Russian State News Agency TASS.
I am here to float a different view.
Yes, there will be short term financial stress in Britain as they begin the process of extricating themselves from the cumbersome monster of EU regulations, laws, and dictates. Markets hate uncertainty and uncertainty will abound as the multiyear process to unwind the UK from the Continent unfolds. However, uncertainty creates opportunity.
I say buy the UK on any serious dips. This includes the pound at the level it trades at today.
Once Britain does finally get out of the wet blanket of EU authority, with its sovereignty restored, the U.K. economy will skyrocket. This is of course dependent on Labour not reapplying all the job killing regulatory strata that is killing the European economies. When you combine this removal of EU law with the austerity that the Tories have installed, you set the stage for a roaring economic comeback that could eclipse the Continent with its moribund growth rates and exorbitant levels of sovereign debt.
A great opportunity to take a position in the pound will be when the Bank of England does cut rates in the near future to stimulate the economy as it forewarned it would today. Once the economic fuse is really lit in Britain, rates will go back up and so will the pound Sterling.
The United Kingdom is the 5th largest economy in the world. There is no way the European Union will cease doing business with Britain as they have threatened to do recently. This is just sour grapes that will pass. Britain will be fine. There is one wild card and that is Scottish independence; but, for the moment, that risk seems to be diminished.
So, my advice is to buy Britain on the dips and sell the Continent. Nice pair trade, huh? Europe is not going to return to strong economic growth anytime soon. There are too many problems. Migrants, the periphery economies, high levels of debt, and a lack of political will to form a real political union will hamper European growth.
Britain will be free of this hot mess. Buy Britain.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a columnist for the Washington Times. LToddWood.com