What changes when we leave the EU?

Julian Jessop, Independent Economist www.julianhjessop.com

As it stands, the UK will leave the EU at 11pm GMT on 31st October. Of course, nothing here is certain. MPs may try to block a ‘no deal’ Brexit, the EU might agree to a further extension, and the UK could still decide to remain. But let’s assume there are only two scenarios – that the UK leaves at the end of October under essentially the same Withdrawal Agreement (WA) as negotiated by Mrs May, or leaves without a deal. What would then change?

For most Leave voters, ‘Brexit’ means that the UK would no longer be bound by the Treaties that establish a political and economic union between the participating states. The most important of the economic arrangements here are the Single Market and the Customs Union. Both have benefits (rights) and costs (obligations).

The Single Market guarantees the free movement of goods, services, capital and people, including the right to work. But it also imposes common regulations and standards that apply to the whole economy. The Customs Union eliminates tariffs on trade between member states. However, members have to impose common tariffs on goods imported from outside the Customs Union, effectively ruling out an independent trade policy.

There are other changes in the pipeline too. For now, individual states retain control over most other aspects of economic policy, including taxes and benefits. But there are already exceptions, such as VAT rates, and agriculture and fisheries. What’s more, the general direction of travel is towards more integration, more centralised decision-making, and greater use of majority voting in areas that had previously required unanimity.

This process was held up only temporarily by the rejection of the proposed EU Constitution in referendums in France and the Netherlands in 2005. Many of the changes were subsequently incorporated as amendments in the Lisbon Treaty, which came into force in 2009.

If the UK leaves under the terms of the current WA, the UK would retain most of these obligations, including financial commitments, and some of these rights, at least during a transition period until a new long-term agreement can be struck. In effect, this would keep the UK bound to the Single Market and Customs Union until 2021 at the earliest, meaning that 31st October 2019 would mark what many have called ‘Brexit in name only’. Not much would actually change, and many might fear (or hope) that it never will.

With ‘no deal’, the default is that the UK would be treated no better (or worse) than any other third country. World Trade Organisation (WTO) rules would require the EU to impose the same tariffs on imports from the UK as it does on other countries that do not have a trade deal. There would also need to be additional border checks and other ‘non-tariff’ barriers to trade. This would clearly be second best.

However, there are many steps that the UK and EU could take, either unilaterally or by separate agreements, to minimise the short-term disruption, protect citizens’ rights, keep goods and medicines moving, planes flying, and so on. Hopes that the UK and EU could use the obscure ‘GATT Article XXIV’ to keep trade tariff-free may prove to be forlorn. But it has already been agreed that the Common Travel Area will be maintained in Ireland, and both sides have signalled that checks can be done away from the Irish border.

Either way, though, Brexit looks set to remain a painfully drawn-out process. A new Prime Minister may inject a new sense of optimism, but 31st October may just be one more milestone on a long and rocky path.

Julian Jessop is an independent economist who attends meetings of the KMG Investment Committee.

What happened to our interest rates?

Nick Matthews [email protected]

Everyone knows that interest rates are at rock bottom and have been since the financial crisis over 10 years ago. Sometimes you have to remember the other side of the coin, inflation has also been incredibly low. Indeed, it is the fear of deflation, via a deep recession, that has led central banks to keep pumping money into the global economy.

We have seen asset prices rise across the board. There is a reason that house prices jumped in London (even if it has ebbed in recent months) and it is the same reason they also jumped in Vancouver, New York, Paris and pretty much every half decent capital city around the world. Visibly, those with capital assets – whether houses or investments – have seen their wealth jump while salaries have remained where they were.

If you put huge amount of money into the system, it has to go somewhere – on the assumption that it isn’t literally put under the mattress.

More money chasing a relatively fixed number of assets leads to price increases and central banks have printed with abandon. In the US, they printed over $4.5 trillion. In the EU, it was some $600billion, a similar amount was created in the UK. Add to this huge action by the Japanese Central Bank, and in China and you can see we are talking about astronomical amounts of money.

So how come people are still worried about deflation? Printing money has not led to the wage increases and virtuous cycle of increased consumerism across the nation that was perhaps hoped for.

On the plus side, we haven’t had such a catastrophic recession as seen in the 1930s but I rather think we have ended up in a near zero rate position from which we aren’t going to escape. In fact, any efforts by central banks to reverse course have been met by horror in the equity markets, which is strange because it would signal a return to a more ‘normal’ state of play. Instead it looks nigh on impossible to raise interest rates without crashing the economy, and that means it will be unpopular with politicians; see the importance Trump places in the stock market as a signal of success.

Higher interest rates please savers and give central banks room to move when there are economic problems further down the road. Yet it also makes it harder for people to pay their mortgages or companies to borrow and invest, not to mention that governments have to meet their interest payments on the massively increased debts. It is all terribly complicated and no one really knows what the future will hold.

For me, we look at Japan where they have seen low interest rates and low inflation, with little growth in stocks and shares for the past twenty years or so. This could easily be the model that the rest of us now follow. But remember, quality of life in Japan is high in spite of this.

It is time to consider how your investment portfolio is placed and the expectations you have from it. But remember, if inflation is very low, lower returns might well be what you need to ensure your financial security remains. Instead it is the following generations who need to worry how they can build an investment portfolio, and that is a very real dilemma in a world where balancing enjoyment in the here and now is pitted against saving for the future.

The world we leave behind

Nick Matthews [email protected]

I have chosen to move away from Brexit, not because it is unimportant but because it has been covered in this Bulletin already, and in every newspaper and website ad nauseum. And we still don’t know what is going to happen in October, let alone in the years afterwards.

So, instead, I wanted to look at the moral and behavioural issues surrounding our lives, and the way in which we invest our savings in particular. Not just now, but as we look ahead.

Since the release of the Blue Planet the subsequent social response has clearly pushed environmental issues higher up the conversation list. We look at what Patrick is doing in cycling 7,500 miles, through Siberia an area currently hit by both flooding and wild fires, and this is a pertinent example of lifestyle and environmental influences. I thought it was worth looking at the link between a successful investment strategy and the guidance or control that we, as investors, can have on companies, profits and the direction they take.

I mention this now because not only is Patrick raising awareness for healthy eating and exercise, but here at KMG we are making efforts in our own small way to improve the way in which we operate, from recycled paper to solar panels, reduced use of plastic, the electric car and so on.

In the UK we have seen the ten hottest years ever, all since the turn of the century. But at the moment, the environmental issues is not an investment decision in itself, not really. But it is becoming one.

The time will come when the impact that a company has, regardless of whether it is on the environment or healthy eating, on education, energy or health will be absolutely central to its success. I am not talking about at the fringes, but across the board from oil companies to clothing to food production. It is easy to imagine a virtuous cycle, where consumers are drawn towards companies who provide a service or product that has a positive impact on their environment.

Wouldn’t it be fantastic if this, rather than cost, was the prime motivator of our consumer habits? In this world, consumers flock to positive, green companies. These companies generate turnover, spread good ideas and earn greater profits. Investors like profit, and so invest in these same companies, eventually making them the absolute core of a successful investment strategy. Wouldn’t that be nice? I fear we are not there yet.

But there will be some companies that survive and flourish. At the moment, it is incredibly difficult to know what different people deem as ethical or green as these are often higher risk and more expensive than a mainstream investment portfolio. Also, should you exclude large multi-national organisations who have their fingers in many different pies or is more government interaction required to change behaviour (perhaps through more sin taxes such as those on sugar, plastic bags and so forth).

With raised public awareness, opportunities for environmentally positive investment have poured out from all corners. Most of these are to be avoided! Some are desperate attempts to jump on the popular bandwagon, while others miss the point entirely; so while most people are likely to agree with the central principle of investing in a socially responsible, environmentally friendly manner, it is still very difficult to sort the wheat from the chaff.

Perhaps I should mention Brexit here. While I am looking towards the future, Brexit brings greater focus on events in the here and now: will the environmental argument be overtaken by tax cuts, immigration policy or HS2? I am not sure that when it comes down to it, we have yet reached the place where enough people are prepared to make real sacrifices to the way in which they live to make sweeping changes. However, it is coming, and I look forward to discussing this further with you.

It’s all about the outlook

Christine Norcross [email protected]

If you listen to the radio, read a paper, watch TV or even receive unsolicited calls(!) you will be WELL aware that the PPI deadline is fast approaching so what will be the next mis-selling scandal for the ‘no win no fee’ conglomerate? The industry has already experienced widespread endowment complaints along with the personal pension review between 1988 and 1994 as some of the big ones. But we know pensions are never going to be far from the scrutiny of the regulator, or the public, and for good reason. Looking at the news headlines from the fall out of the British Steel Pension Scheme make sobering reading. However, as headlines report rising state pension ages, trouble at major pension schemes and the risk of scams – it can feel like a very worrying and uncertain time for people who want to make decisions about their future and their finances.

To put things into context, figures obtained from the Financial Ombudsman Service confirmed that in the financial year ending April 2018, less than 2% of the complaints received were about pensions; meaning that this is just a fraction of the work that the ombudsman does. Our regulator, the Financial Conduct Authority has already tightened up the rules for providing clients with pension advice and are increasing qualification levels which the industry will have to adhere to by October 2020. Here at KMG we are always focussing on continuous improvement and there is not usually a time where one member of the team is not sitting an exam! We embrace the regulator’s approach to tightening up exam standards having been ahead of the curve in this respect for many years. You as clients have a very high-level team supporting you, with not simply highly qualified advisers at the firm but some of the most highly qualified paraplanners in the industry.

Listening to Patrick’s message whilst completing his #Lifecycle, the importance of positivity has really struck me. In a world where infotainment is king, it is important to remember that there are always opportunities and progression to be embraced. As you well know, KMG is a company that prides itself on our team. At the core of our advice process is a focus on getting to the heart of what you, the client, seeks to gain from your financial planning. We enjoy coming up with solutions, new and tried and tested ones, to help you navigate political upheaval, regulation changes, investment volatility and so on. In a world which can be tempted to focus on the negative, we continue to challenge, push and succeed on what we set out to do.