The Blog

Muhammad Ali's Brexit Insights

"It isn't the mountains ahead to climb that wear you out; it's the pebble in your shoe"

Muhammad Ali

The Greatest champion of all times passed away last month, following an exhausting fight against Parkinson. Considering the recent developments and the obstacles on the road ahead, it looks as if the global economy also faces an epic struggle to keep growth going let alone boost it. On the long and winding road up the mountain, many countries are not so much hampered by pebbles in their shoes as by huge debt and populist burdens on their backs.

In the US it became clear that Donald Trump will be the presidential candidate representing the Republican party (bar unpredictable developments at the Republican convention this summer). His opponent will most likely go by the name of Hillary. Neither candidate is universally popular but we think the prospect of a Trump victory will unnerve the markets more. Now we know the outcome of the EU referendum, such a win will be taken more seriously.

I shook up the world

Before Brexit materialized, the bookies and most analysts thought the likelihood was low but they underestimated how eager voters were to "Take back control!" from Brussels and ignore 'official' warnings and scaremongering with economic doom and gloom scenarios. After the world suffered the biggest daily loss of global equity markets ever, the British voter could justifiably and rightly repeat Ali's words: "I shook up the world. I shook up the world."

How the divorce will now be handled remains to be seen but it will undoubtedly be a tortuous process as the UK is divided to the bone. There are gaping gaps between young and old, poor and rich, London and the rest of the UK. England/Wales and Northern Ireland/Scotland are in opposing camps while voters are increasingly estranged from politics.

Glimmers of hope in sea of darkness

This splintering process will not be reversed any time soon. Plus, it puts pressure on other EU states to hold a referendum. Although we do not think this will take place in the near term, political discord and uncertainty are rife. In Spain, there is no clarity about who should govern the country even after two elections in the space of six months. Over in Italy, PM Renzi's position is at risk following disastrous local elections while a referendum will be held in October on changes to the electoral system. Renzi has thrown in his lot with the outcome.

Half of the seats in the Japanese Upper House are up for grabs in July. There is every indication that PM Abe will gain the day but this does not mean to say that he will run a tight economic ship. His party may gradually unwind the monetary component of the famed three-arrow-policy (Abenomics) due to growing criticism of the Bank of Japan.

There are some political glimmers of hope in Latin America where "super populism" appears to be making way for "normal populism". Developments in countries such as Argentina, Brazil, and Cuba could be beneficial to the markets.

Nonetheless, we see all of the above developments contribute not only to more downward pressure on the British pound and British stock markets, but also to more headwinds for the Eurozone.

What does not kill you ...

The response to the Brexit vote will probably not be of one Europe pulling oneself together and strengthening Europe in areas that can only be tackled jointly. For such a united approach divisions within Europe are simply too large and there remain too many unknowns .

This means a weaker euro and probably larger spreads between the interest rate spreads between German bonds and those of the euro periphery countries. The other side of this coin is that we can continue to expect a flight to traditional safe haven currencies: (notwithstanding the Trump-threat) the US dollar, Japanese yen and Swiss franc.

The global economy has been through a lot of change in recent years and grey clouds continue to hang over the markets. So let us take heart from Ali's words to end with an upbeat perspective:

"Only a man who knows what it is like to be defeated can reach down to the bottom of his soul and come up with the extra ounce of power it takes to win."