Why I’ll leave it to others to play the Brexit trading game

    5 March 2016

    As a family, we’ve always tried to get along with our neighbours. But the latest to rent next door — who happen to be French — are proving a challenge to that principle. My favourite example of their unreasonableness was when they demanded my husband stop mowing the lawn because they were having lunch. They scream abuse out of their windows if we call the cats in before 9 p.m. (Fluffy Whuffy has a heart condition and I don’t like him out at night), but a PA system in their garden spewed out noise one entire summer Sunday afternoon. They have caused me seriously to consider voting Yes to Brexit in the hope — how can I put this — that they might bugger off back to their homeland.

    For many of us, which box we tick in the referendum will come down to just such personal issues. Have you successfully employed good eastern Europeans as cleaners or builders, or do you think they have undercut your wages? Has your business profited from EU markets or been hit by an excess of Brussels red tape?

    But the arguments over whether EU membership is good or bad for the whole country are far more complex and confusing. For every businessman or economist who says being part of this union is positive for the UK, there’s another who says it’s not, and yet another who says it makes very little difference. The problem is that the UK has never left the EU before; no one has. There’s no precedent. And there are too many unknown variables to form a definitive conclusion, not least because any new trade deals won’t be negotiated until after the vote.

    City ‘experts’ are cautious in estimating the long-term economic and financial impacts. If you’re paid a six-figure salary to offer opinions, ‘I haven’t a clue’ really shouldn’t be an option. But even JPMorgan says the hit to UK GDP from Brexit is ‘hard to calibrate’.

    So the only thing that’s certain is uncertainty. Markets hate uncertainty at the best of times, and we’re far from those. Global financial markets have had a volatile start to the year. Take your pick from a long list of fears including a rapidly slowing China, the debatable creditworthiness of Europe’s banks and the impact of on oil-exporting countries of $30 crude. At home and abroad, recovery is fragile, financial systems weak and governments indebted. Add referendum uncertainty to that mix, and the timing of the vote couldn’t be worse.

    Goldman Sachs warns that Brexit could cause a 15–20 per cent decline in sterling — but a lower pound can either help or hurt the economy: good for exports, bad for import prices, consumer spending and foreign holidays. As for borrowing costs, they could go up or down. And few pundits are willing to forecast a fall in the FTSE100 the day after a vote to leave, though a fall is clearly more likely than a rise.

    So it should come as no surprise that, Brexit or not, I’m still investing as I have always done. For this year’s Isa, I put more into bonds and less into equities to reflect growing evidence of zero inflation. But I generally ignore short-term market fluctuations, diversifying across assets and geography and investing for the long term, passively and at low cost.

    I haven’t forgotten that, for the brave, buying when everyone else is afraid can be profitable. The US stock market is up around threefold since the worst days of the financial crisis. But as I have written before, market timing is notoriously difficult — so I don’t bother. The one trade that sounds tempting is to be ‘long volatility’: that is, to seek profit from UK markets becoming more volatile as uncertainty increases.

    But in order to buy volatility, I’d need to dabble in derivatives — those ‘financial instruments of mass destruction’, as billionaire investor Warren Buffett once called them. I think that explains why I’m not punting on that trade.

    To position your portfolio for Brexit, you also need to take a view on the probability, on current polling, of a vote to stay in. But after the experience of last year’s general election, are you really ready to bet on pollsters predictions of the referendum result? So no thanks, I’ll leave it to others to play the Brexit trading game.

    Margaret Thatcher famously said on being elected Prime Minister: ‘Where there is discord, may we bring harmony.’ The disharmony many Britons feel in relation to the EU could take us down a very uncertain road. As for this corner of SW19, Anglo-French harmony has been absent for some time. Never mind the referendum result, I can’t even forecast when my husband will be allowed to mow the lawn again.