Investors worried by the uncertainty surrounding the whole Brexit process won’t have found much to cheer them in the recent Euro election results from Sunday. On paper, it simply confirmed what we all probably know, which is that there are a lot of very dissatisfied hard line Brexit supporters out there plus an almost equally large number of pissed off Remainers. Crucially these numbers are also the product of a hardening of the debate so we can say with some certainty that the vast majority of people who voted for either side, really really believed in what the respective parties suggested in policy platform terms..

So, what does this reveal? First off, I think we are still stuck in an impasse over the original referendum result. My guess is that we are probably at around 50/50 on the basis of these results – assuming we were to rerun the referendum.

In the table below I’ve used the last numbers from the BBC on the Euro election results. I’ve then got out the legendary fag packet and made some very rough assumptions, namely that all Brexit Party voters would vote Leave and ALL LD and Green Party voters would vote remain Remain (if not, what on earth are Leave voters doing voting for these guys!?).

I’ve also assumed that the Labour vote split roughly 50/50 for Remain and Leave while the Tory vote probably went more two thirds leave, one remain (yes there are Remain voting Tories). If you do the maths using these simplistic assumptions, you end up with 48% in favour of Brexit and 49% in favour of Remain. But I also think that some Remainers might sneak across into the Leave column if they were forced to choose. So, we’re still stuck in the same old binary situation.

The key numbers that move are for Labour. I think it is reasonable to presume that there are a large number of Labour voters who favour Brexit but don’t favour a ‘Tory Hard Brexit’. That at least is what their leader says in a policy of equivalence that is currently looking nothing short of ruinous. If we make that assumption, then I think the vast majority of Labour voters move into the ANYTHING BUT NO DEAL column if they were forced to decide between a Hard Brexit and anything else. I also happen to think that there may be more ANYTHING BUT NO DEAL Conservative voters than I have allowed for, not least a fair chunk of the Cabinet. However, you torture the numbers I think you always come up with at least 50% if not 55% of voters who want anything BUT NO DEAL. Boris beware !

So, we’re stuck in limbo. No Deal could be forced through, but it would be mightily unpopular in an increasingly binary divided electorate. This runs the real risk that if No Deal was barged through, a future alternative government might try the Brexit equivalent of a Trump impeachment process i.e try to re-enter the EU in some new form of association. And good god we’d all be back at the beginning of the process. The horror!

From an investment perspective that all adds up to yet more uncertainty, which will drag down the pound and hit sentiment for domestic investors. I also happen to think that this  increase in uncertainty makes a brash NO DEAL Brexit more likely (over 50% probability) because the Leave side will think that the only way to break the uncertainty and the binary divide is to hammer home the most radical solution, a complete break. Which, I repeat, the markets won’t take nicely to. Nor might the electorate which might/could/hopefully not result in a general election and a Labour government. The horror !

Party % in Euro elections % support Brexit % oppose Brexit % support No Deal % support anything but no deal
Brexit Party 31.6 31.6 0 31.6 0
LibDem 20.3 0 20.3 0 20.3
Labour 14.1 7 7.1 4.1 10
Greens 12.1 0 12.1 0 12.1
Conservatives 9.1 6.1 3 6.1 3
SNP 3.6 0 3.6 0 3.6
ChangeUK 3.4 0 3.4 0 3.4
UKIP 3.3 3.3 0 3.3 0
Sub total 48.1 49.1 45.1 52.4


Thoughts on emerging markets

On Monday I spent quite some time talking in this blog about China and its likely reaction to the escalating trade war. My own view is that a deal will be done, at some point, in some shape or another but that we are just at the starting point of a more serious escalation in rhetoric, which presages a new Cold War. Bizarrely, as with Iran, our best hope might be the President who I think has much more mixed feelings about a standoff with China than some of his advisers.

Anyway, one slightly peculiar aspect of this relationship is that just as the US ramps up pressure on China, US investors might be forced to buy more Chinese equities. That’s because there are some fairly important technical changes afoot for the MSCI EM index. This index is hugely important for ETF trackers and some major technical changes are imminent based around which stocks and countries to include in the index. One of the big revisions is that the weighting of China A-Shares is going to increase, from a 5% inclusion factor to 10%. Estimates indicate this could lead to a one-way passive flow of $3.8 billion following the inclusion.

And my guess is most of that money will come from US equity funds.

Funny old world – a new cold war starts but US equity fund managers are forced to ignore it.

The other key move is Saudi Arabia’s inclusion in the MSCI Standard Indices. Once the inclusion is complete at the August rebalance, Saudi Arabia will make up 2.7% of the index, and emerge as the 8th largest country overall. Some analysts reckon this could lead to one-way passive inflow of $6.5 billion. So, let’s hope there is no war with Iran or the MSCI EM could be in for a drubbing in the next few months.

Talking of drubbing, watch out for Turkey. I’d expect much more trouble over the next couple of months as strong man nationalist President Erdogan digs in in his confrontation with the US – and his own domestic opponents. The latter will be closely watching the results of the election rerun in Istanbul, due on June 23rd. Polls suggest the opposition will win again, but the President will pull out all the stops to overturn the oppositions earlier success. June is also a tricky month at the geopolitical level as the US is demanding that the Turkish government rescind its order for a new Russian missile defense system and replace it with their own Patriot system. My guess is that Erdogan will refuse to back down and we’ll see new sanctions against Turkey.

Expect Turkish equities to take another hit along with the local currency. But sooner or later, despite all the populist noise, investors will find a sensible price for a country that is one of the largest offshore manufacturing centres for Europe. Turkey also has a vibrant domestic private enterprise sector, despite Erdogan’s badly conceived policies, and a huge domestic consumer market. There are two well traded Turkish equity index tracker funds, both of which will probably have a torrid time in the summer but are worth keeping an eye on the long term as a contrarian bet.

  TER Ticker 2019 2018 2017 2016
Turkey ETFs
iShares MSCI Turkey 0.74% ITKY -18% -38.5% 25% 9.53%
Lyxor MSCI Turkey 0.45% TURL -18% -39.3% 24.6% 12.45%