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Three weeks ago Gavekal’s Anatole Kaletsky wrote about the chances of one populist vote victory in the near term: Brexit and Trump in 2016 and the right-wing Alternative for Germany (AfD) in 2017. Statistically, he gave this a more than a 50% probability, whilst also suggesting that a vote for the UK to leave the EU would increase the chances of a potential Trump and/ or AfD victory.

The factual reality of the outcome of the Brexit vote was shared by polling expert John Curtice: ‘Today the cosmopolitan, socially liberal Britain was outvoted by a more socially conservative part of the country that is deeply concerned about immigration.’ This echoes with Donald Trump’s reaction on Friday, calling the Brexit Vote a ‘great development’ and fits in with his own campaign to renegotiate free trade agreements and stop illegal immigration.

Trump goes on to say that ‘ People want to take their country back. They want to have their independence in a sense. You see it all over Europe.’

Within the UK Brexit vote results one can clearly determine the divisions between predominantly pro-EU younger voters and more anti-EU older generation. But the key determinant – according to Curtice – was the split in education level, with graduates much keener on remaining than those with a few, if any, qualifications. Moreover, it is also pretty obvious that the growing Gini co-efficiencies also cause a divide between a limited amount of rich voters and a large pool of middle to lower class voters.

Trump is right in one respect: it is pretty much the same all over the world. In South Africa, for example, we have had several protests against immigrants (xenophobia attacks). The US and the rest of Europe have similar fears within ‘traditional’ citizens who are more and more challenged by foreigners for job opportunities (or at least claim to be).

So what if more populist votes change political leadership globally? It is a democratic process after all. The problem is the uncertainty it creates in the mind of economists, business owners and investors. Markets prefer certainty, a more predictable future and stability in leadership and do not react well to evidence of uncertain outcomes.

Britain’s voting for a Brexit has caused the following uncertainties:

  • It is by no means certain that the ‘new’ UK government will start a secession process by enacting its rights under Article 50 of the EU treaty to formally divorce itself from the EU. That would be up to the next prime minister after David Cameron’s resignation on Friday and once set in motion, the UK has 2 years to negotiate its way out of the single market
  • At the time of writing, Reuters reported that EU has sent a message to Britons to act swiftly to start the process of a quick and clean divorce. It is hard to imagine easy negotiations to regulate US$ 575 billion of annual trade between a newly elected UK Prime Minister and 27 other EU counterparts.
  • Although existing regulations remain in place during a secession period, business owners and investors will have a long period of uncertainty before UK companies are able understand the terms under which they will be likely to access the EU’s $13.6 trillion economy.
  • The same applies to banks in the UK & Europe
  • As these events are putting the UK into a period of political and economic uncertainty, it may influence the Federal Reserve to hold back on raising interest rates in the US.

Since we (along with most other asset managers) expected a rational economic outcome to vote against a Brexit this week, we were genuinely shocked by the outcome on Friday morning. With more elections looming: in SA, the US and next year in Germany 2017 and with the possibility of in / out referendums taking place elsewhere in Europe, all of us are now much more careful in judging the power of populist politics.

Half Time Score: Populist politics 1 – Rational outcomes 0!

We are in the process of re-considering the amount of risk we hold in all our portfolios and funds.


Populist Politics 1 - Rationality 0


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