The Psychology of Brexit

\"\"Brexit was a significant single external event which will impact us all but to differing degrees. It is interesting both for its economic and political implications, but also for the way people have behaved. Emotions direct consumer behaviour and as such it might be worth looking further into the morass.

Viewing the events through the model of grief, first noted by Kubler-Ross, might be useful here but remember it is only a model.  Some of the ‘stages’ of grief include:

  1. Shock / Denial
  2. Anger
  3. Bargaining
  4. Depression
  5. Reflection
  6. Acceptance / Delusion

When a prime mover in the Brexit campaign, Boris Johnson, complained of being woken on Friday 24th June to cries of “Oi! Boris, c**t” it was clear that this group had already moved to the 2nd stage of grief (Anger). Yet others were saying that Brexit did not matter because it would take 2 years to exit the EU once Article 50 was triggered (Acceptance).  And others, including Nicola Sturgeon, the Scottish leader, trying to get meetings with European leaders in order to try to retain Scotland’s membership of the EU (either Bargaining or Denial depending on your viewpoint, or even Delusion).

The cabinet minister and ex- conservative party leadership aspirant, Jeremy Hunt, suggested that a 2nd referendum could be held regarding Britain’s exit from the EU (Bargaining or Delusion).

Thus it can be seen that different people, whether politicians or the man on the Clapham omnibus move through these stages at different rates, with some getting stuck in a particular stage longer than others, and missing some stages completely.

In terms of groups of people, I like to look at markets, they are after all a reflection of what people think about the issue, with a rating scale!

The largest 100 companies in Britain (the Footsie 100) closed on June 23rd (the day of the Referendum) at 6338.10.  Two days later it closed at 5982.20, and at close of business on Friday July 8th, it had surpassed the pre-outcome level at 6590.64.  For the next largest 250 UK-quoted companies, the same figures are 17333.5, two days later 14967.86, and on 8th July close at 16177.75. This shows investors moving through the stages rather quicker than the commentariat.

The Shock phase lasted 2 days, and we appear to be in the stage of reflection, as of July 9th, when I am writing this article.

So what’s going on here? I think these changes reflect 3 main things:

  1. The largest companies are most influenced by pension funds and institutional holders of securities who therefore have the best systems and (in theory) the best people, who will have engaged in some scenario planning and therefore perhaps, can process the information most accurately and speedily
  2. The Footsie 100 companies have a much greater proportion of their earning denominated in foreign currency and thus upon translation into Sterling, these earnings have become significantly more valuable bearing in mind Sterling’s fall against most currencies but particularly the US dollar.

The 250 however is more domestically focussed and therefore foreign currency earnings are a much smaller proportion of total earning and therefore have not benefited to the same extent.

3) This is the part liquidity plays, but that subject is outside the scope of this article

Thinking about Stage 5, the issues will be how does the UK get access to the EU and at what cost and how much latitude the UK gains to limit immigration.

It is worth remembering that in just the first 3 months of 2016 according to the Office of National Statistics (ONS), Britain had a £34.7 billion deficit in trade and goods with the EU, whilst the estimates for the UK surplus in services over the same time period with the EU is £21.4 billion, thus the first quarter net deficit with the EU was £13.3 billion – a sizeable figure by anyone’s estimation.  It is this which will give Britain a strong negotiating hand when it comes, as seems likely, to renegotiating Britain’s relationship with the EU.

The other major levers that Britain has are the most significant armed forces in the EU, and the announcement in the last few days that Britain is going to increase its deployment of troops in Eastern Europe and beyond should be seen in this light.

George Osborne, the UK Finance Minister, perhaps surprisingly has managed to show that he can think strategically with the recent announcement that he is considering reducing the corporate tax rate from 20% to 15%. This will have the effect of having a well organised, politically stable, tax haven on the door step of the EU, acting as a potential lure.

There are, of course, many softer arguments as to why the EU would want to retain close working arrangements with Britain, as a bulwark against Germany and as a voice which was supported by those recently joined Easter European countries.

In a world where the key issue is a lack of demand and hence a lack of pricing power, leading to deflation, the economic reality of allowing spite into negotiations would be particularly painful for all sides. It is this that markets worry about. Thus, it was heartening to see when Angela Merkel, the German leader, had a meeting post-Brexit with the French and Italian French and Italian Prime Ministers with the rotating president of the EU, Donald Tusk.

Jean-Claude Juncker the Luxembourgish politician who is President of the European Commission was pointedly not invited and Brexit negotiations will be managed by the European Council, i.e. the country leaders rather than the EU bureaucrats that Juncker heads.

We all create narratives for the actions in our lives and having a narrative keeps us emotionally safe. As market participants however, this is when the accuracy of the narrative and its ability to track reality has its acid test and any shortcomings are paid for in cold hard cash.  The other important elements are mental fortitude and the ability to stick with process.

As Charles Darwin might have said “It is not the stronger of the species that survives, nor the most intelligent.  It is the one who is most adaptable to change.”