Brexit is a buying opportunity

That an exit is nowhere near as damaging as predicted is beside the point: volatility itself is the game.

The negotiation will revolve around the trade relationship between the UK and Europe. Picture: iStock.

With all scary economic and market events that are known about ahead of time, the doomsayers always overstate their case.

It happened with Y2K, the US debt ceiling panic, various Greek loan repayment emergencies, and peak oil, to name a few. The only times the future negatives aren’t exaggerated are “black swans” that no one sees coming, and then markets just catch up, by overreacting afterwards.

As a result, virtually every negative market shock in history has been a buying opportunity, and this one will be no exception. (The only exception I can remember was the UK’s emergency nationalisation of Northern Rock in February 2008, which resulted in panic which was initially taken as a buying opportunity, so the market spiked in March, but it was actually a time to run for your life.)

With the UK referendum, both sides have overstated their cases. Brexit is unlikely to be a disaster for either the UK, Europe or the global economy, and remaining in the EU, especially by a narrow vote, would have solved nothing.

Markets are panicking now that the vote has been cast and Leave has won. That the vote is non-binding, the process will take a long time; that it will depend entirely on the exit arrangements, and will end up being nowhere near as damaging as the Remainers have predicted is beside the point: volatility itself is the game.

Short-term volatility is both upsetting for the public and profitable for the traders who set marginal asset prices and exchange rates.

If the volatility lasts beyond a few days and sends the US dollar significantly higher for longer than a few days, it could some fairly profound effects, such as ruling out a Fed rate hike for the rest of this year.

But in my view Brexit will, as usual, be a long-term buying opportunity, both for equities and the pound.

If the pound drops next week, as seems likely, and stays down, then British industry will become more competitive and perhaps start taking market share off the Germans. The idea that the UK will lose European trade if it’s not part of the EU is absurd – just ask China. They know that trade is all about price, not alliances, and price is mostly about the exchange rate.

The UK Treasury and the OECD have estimated that the cumulative impact on British GDP of exiting the EU would by 5 per cent over 15 years – that is it might be 5 per cent lower in 15 years than it would have otherwise been.

That implies the impact on annual GDP growth would be minus 0.3 per cent, which is not nothing, but hardly recessionary and likely to be swamped by other factors – especially if the pound depreciates.

In any case, the effect would depend entirely on the exit deal that the British Government actually negotiates, if it does.

Some are pointing out the referendum is not binding, so that a close vote for Leave might not be enough to prompt the British Government to actually do it.

I think that’s unlikely. A close “Stay” vote would have been inconclusive, but any kind of “Leave” vote will have to be acted upon. But it might take a long time to start the process.

Under the Lisbon Treaty if a country notifies the European Commission of its intention to leave, then a withdrawal agreement has to be negotiated. This can take up to two years, at which point membership of the EU simply lapses, and it’s likely that a reluctant British Government will take all of the two years.

The negotiation would revolve around the trade relationship the UK would have with Europe. Would it be part of the European Economic Area with Iceland and Norway, and therefore continue to enjoy free trade access to Europe?

Probably not, since the UK would still have to accept the free movement of people and contribute to the EU budget, without having any say at all in the rules.

Or perhaps the relationship will be like Switzerland’s, which is based on a series of mutually dependent bilateral agreements that effectively mirror the EU treaties, but give at least the feeling of sovereignty.

In 2014 the Swiss actually exercised that sovereignty by passing a referendum imposing quotas on the free movement of people, which will theoretically collapse the whole house of cards of Swiss-EU treaties. The referendum gives the Government three years to impose quotas on immigration, so that has a year to go.

In any case, the impact of Brexit on the UK economy will depend entirely on the deal that is negotiated over the next two years or so, and then it will take a while for the effect to be felt.

The other source of volatility in the lead up to, and immediate aftermath, of today’s vote is the potential impact on Europe. Will it be like Grexit, and lead to an eventual break-up of the Eurozone, or the EU?

The answer is: very unlikely. Britain kept the pound, it didn’t go with the euro. Its exit from the EU would only affect the Eurozone if other countries decide to follow it and exit both the EU and the Eurozone.

But Greece has shown why that will not happen - after all if any country was ever going to flee the euro, it would have been Greece.

It didn’t, and nor would Italy, Spain or France, because bank debt would remain in euros but their assets would be in the, much lower, reborn national currency. The banking system would promptly collapse and deep recession would ensue.

In fact it’s hard to think of any serious long-term harm from Brexit, and certainly nothing that justify selling BHP Billiton 8 per cent below Thursday’s close, as some were doing on Friday afternoon, or knocking nearly 5 per cent off Westpac.

Yesterday was a wild, indiscriminate risk-off moment for global traders, which are always wonderful moments for the serious long-term investor. For a while they could pick up BHP for less than $18 again, and Westpac for a yield of 6.7 per cent. Beautiful.