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Working with the Backdrop of Seismic Events – July 2016

A week certainly was an interminably long time in politics.  Seismic events have been taking place at every turn following the Brexit vote.  Like it or not, in one form or another, we are on the way out; Brexit means Brexit – whatever that means and by the time this gets published it may mean something different from what we are guessing it means now.

Foreboding, turmoil, disenfranchisement, concerns, uncertainty and then came Theresa May.  Whilst there will, and already has been a cost, the authority which Theresa May displayed in her first week was admired, perhaps begrudgingly by some, but universally within the Tory ranks as the best choice to lead the Country at this point.

Feelings of foreboding, turmoil and disenfranchisement fell away, leaving only concern and uncertainty, but she has, at least, given all the impression of being in control.  Authority and control right now steadies the nerves.  We can get on with our own jobs knowing that there is actually someone running the country and we do not have to second guess that anymore.

I do actually wonder whether the hand of fate is helping the new PM as the turmoil in the Labour Party renders that institution sterile and regrettably unelectable, (all governments need strong and electable opposition) but that very instability and weakness adds to the Prime Minister’s authority at a time when it is most needed with any change in Labour’s ability to be anything other than the ‘official’ opposition extremely unlikely. It is ironic that her biggest problem will continue to be the hard-line Brexiteers and with the slim majority of 12 she will have a fine line to tread. Maybe the advocates of a snap election have it right to give her what would surely be a much larger majority as stability and safe hands are valued right now.

So we are living through exceptional times and in the next five years, perhaps sooner than that, we will discover whether Brexit was the biggest ‘own goal’, an act of folly and hubris or an inspired decision by a country eager and hungry to take back control of decisions which affect its citizens (Queen’s Subjects actually), rather than being told by a Frenchman or German or for that matter unelected Luxemburgish bureaucrat, how we can carry on. Our islander character has flared up and enough is enough.

Of course, I expect most of what has come out of the EU will be adopted as our own and will be legislated on but that task is enormous and will keep our own Whitehall civil servants in jobs for years to come, but that is not the point.  The country has decided that rather than arguing our corner from within, we would take back our destiny and stuff the cost.

There will be a cost, the success of our own negotiations on tariffs and trade will have a direct bearing on income, tax revenues and therefore public spending.  The very thing which aggrieved many voters was the totally disingenuous £380million per week figure quoted.  When netted down to around £120 per week, this produced an annual figure of around £6billion.  Okay, a lot, but our GDP, as the fifth largest economy in the world, was $2.85trillion in 2015 or £2.175trillion ($1.31 in the £), our net contribution was around 0.3% of our GDP.  Or putting it bluntly, easily lost in rounding up or down.  Our financial contribution was always a red herring and not an automatically transferable amount to other public expenditure on a Brexit vote.

Commercial property has been affected but when we look more closely, this has been, so far a London centric problem and London had become overheated before Brexit.  The provinces do not experience the same degree of turmoil and with interest rates likely to stay very low indefinitely, and with inflationary pressures already building (due to the drop in the value of sterling), well-let and secure property investment and particularly those with Index Linked income remain much in demand.

Well located property should always be a good long term investment but too many expect their property investments to perform giving growth immediately.  Property, as an investment, should never be considered unless one is happy to have funds tied up.  Those institutions which have called a halt to pay outs, have found that the illiquid nature of property brings with it its own problems but a run on commercial property funds should not affect commercial property values other than at the margin and not indefinitely.  Real value comes not just from investment yield but from demand from occupiers and it is business confidence generally that will have the greatest say in where property values go in the short and medium terms.

The PMI survey reported today (22 July 2016), tells us that Composite Output and New Orders registered their steepest ever recorded falls in June.  Nothing has changed other than confidence and a fall in the value of sterling.  A recession threatens, despite an increase in manufacturing exports so we’re told and this is all the more reason to have the steady hand and proper authority at No 10.

But we are in a different place to that of September 2008.  The banks are in reasonable shape and we remain well placed to take advantage of the best deals which Messrs Johnson, Davies and Fox can produce.

Game on.

Written by Mark S. Hanson

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