Eq: Dev ex-US
We have not written much about Brexit over the last week or so, but we thought it might be time for a worthwhile update because of the event’s implications on the future of the Euro, and thus financial markets. Theresa May is now the UK’s new PM and she wasted no time in appointing a surprise cabinet, including big pro-Brexit campaigner Boris Johnson as her foreign secretary. Additionally, another hardline Brexiter David Davis will oversee the departure negotiations with the EU under the title of “Secretary of State for Exiting the European Union”. The article says Davis’ view on Britain’s Brexit plan and potential is woefully optimistic. It should be noted that Theresa May herself was a mild Remain supporter.
FINSUM: This preposterous cabinet makes it seem like the negotiations with the EU are going to progress very badly. We think the EU will be combative given the team assembled, and this could actually work against the bloc as it may infuriate some countries which are on the brink, like Italy.
Source: Financial Times
There has been a lot of bearishness about the future of Europe lately. Many investors are worried about the potential collapse of the Euro following the UK’s Brexit. However, this piece says that European stocks may just be too good of a deal to pass up. The article is based on a valuation metric that JP Morgan uses for measuring stocks. JP Morgan Asset Management’s argument is that the MSCI Europe ex-UK Index and the FTSE All-Share Index look cheap on a ten-year inflation adjusted basis, with ratios below their long-term averages. The head of European equity strategy at the firm says that “we can see nothing that suggests the referendum result will rock European confidence and growth particularly”, which would boost earnings for European companies and presumably help stocks.
FINSUM: We think this a very narrow view of the situation. Italy, Austria, and Hungary all already have major votes ahead that could hurt the EU and Euro. In our view, fundamental earnings-based investments should be an after thought until those hurdles are cleared.
Mainstream media seems to be coming around to FINSUM’s view on Europe—that the continent appears at a very high risk of political and economic collapse. With that in mind, this piece highlights what might be the next domino to fall—Austria. While this quiet alpine country gets relatively little attention, the nation’s highest court has just annulled the results of its most recent, and very tight, presidential race. The annulment means the right-wing populist candidate will have another chance at securing victory. If that happens, the path to a Euro referendum seems quite likely. The development follows the far-right anti-Euro party’s mayoral victory in Rome recently. Italy is another potential Euro-leaver.
FINSUM: This story is just political speculation at this point, but both Austria and Italy have been cited as leave threats and the developments in those countries seem to be moving towards that eventuality.
In a shocking move today, former London Mayor Boris Johnson, who was the frontrunner to become the next Prime Minister of the UK has announced he will not run for the job. Johnson was the lead figure in the victorious “Leave” campaign in Britain so he seemed to have inherited all the glory, but oddly, has now deflected it, choosing to stay on the sidelines in the new race to be PM. Several other Tory party candidates are grappling for the leadership role.
FINSUM: So Britain’s most dominant Leave figure, who likely would have led the country because of the big political victory, has decided to bow out? This might signal that Brexit is headed nowhere.
Source: Wall Street Journal
Many seem to have been playing down the threat of Brexit by assuming that the UK can negotiate a cushy deal with the EU which will give them the benefits of the EU while preserving their sovereignty. This story stops that thought dead in its tracks, as it highlights new comments from German chancellor Angela Merkel. In a speech to the German Bundestag, Merkel firmly rebuffed Britain’s hopes of having a Norway-like agreement with the EU, saying the UK would not be allowed to “cherry pick” its terms with the EU. The comments were received with applause as Merkel reinforced that “We will ensure that the negotiations will not run be on the principle of cherry-picking”. She gave the statement before heading to the EU summit on Brexit.
FINSUM: This confirms what we have been saying and highlights the threat Britain faces. We think that the EU is going to have to make an example of Britain in order to not lose other EU countries, so we expect negotiations to be very combative.
Source: Financial Times
Don’t be fooled, the Brexit may be just the beginning of a multi-year cataclysm that could be set to undermine the global economy. This article in the FT says that the most likely domino to fall next is European giant Italy. The article takes one through the quite reasonable political logic that would lead the country to vote to leave the Eurozone. The article argues that if the country did so, it would prompt the quick and complete collapse of the Euro, which would set off a financial crisis which would dwarf the Crisis of 2008 in scope and magnitude.
FINSUM: It is fortunate that Britain never joined the Euro, for that would have made this departure much worse than it already is. Europe has a very uncertain path from here.
Source: Financial Times