Credo CIO Deon Gouws: How deep thinking about Brexit has taken me from Remain to Confused

Alec Hogg is in the CREDO offices in London with Deon Gouws, he’s the Chief Investment Officer. You guys have just reached another milestone at CREDO and your assets under management.

Yes, Alec. I’m pleased now that the assets under administration and management have just exceeded £2bn in the last couple of months.

That’s big numbers in Rands, much of it from South Africa still?

In terms of the total quantum it’s probably less than half now as far the amount’s concerned. More than half our clients by number are still in South Africa but increasingly we are gathering assets in the UK as well.

You’ve just come back from South Africa. In fact, you’ve had quite a busy time in the country. What was the purpose of the most recent visit?

There were five of us that flew from London to South Africa a couple of weeks ago and we just did our fourth annual conference in South Africa, five cities in five days, so it was a pretty busy time last week where we went to Johannesburg, Pretoria, Durban, Port Elizabeth, and Cape Town, all in a whirlwind trip.

What was the mood?

I think when I went earlier this year when it was closer to the whole NeneGate episode people were a lot more doom and gloom and I think that people are resilient, so people are dealing with it and moving on for the most part.

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That is one thing about South Africans, that resilience but on the other hand there has been a lot of money leaving the shores and presumably not just to yourselves but elsewhere. Many South Africans are now very confused about Brexit, this EU referendum which is going to be held on Thursday where the British decide whether to stay in or to leave the European Union. How important is it really?

Obviously if you’re living in this country, I think it is pretty important because I think there will be an impact on many levels in terms of the way that the country functions, the whole sovereignty issue which is one of the main things that a lot of people focus on especially those on the Brexit side, so it will have a serious impact. Whether it will impact our clients and our friends and our family in South Africa or not I think that’s the mood. I’ve read articles where they say that the Rand will be under tremendous pressure if Brexit happens because of UK banks calling in the loans.

That may be the case but I think those kind of analyses are often overstated, but certainly living on the ground in this country it’s a fundamentally important question and as such I’ve really engaged with the topic for the last few months, I’ve read a lot about it. You say Alec, that a lot of people are confused. I actually said from stage last week that I started out firmly in the remain camp and having read a lot I’m now firmly in the confused camp myself.

In the confused camp; because you get to vote even if you’re a South African citizen, being a member of the Commonwealth you can vote in this election which would confuse many South Africans in itself.

That is true Alec but you just need to know as well that in spite of this accent of mine I am now British as well, so I now have a primary vote, but I have voted a number of times before I got my British citizenship a year ago.

It is interesting though, most Brits won’t tell you who they’re voting for except in this referendum where they seem to be less private than usual.

Yes, that is true. I think people have very strong opinions and when you say people, in the normal sort of election, they won’t tell you where they’re going to vote, I think that’s especially true on the Tory side. There’s this whole sort of shy Tory factor that’s at play when there’s a general election here. There are a lot of people here that will always vote Tory but they’d rather not say that because the Tory’s are seen to be the nasty party. They’re there for the rich. They want to cut taxes for the rich and they don’t want to do too much welfare, so it’s especially I think the Tory’s that are the shy. Labour Party supporters are generally more outspoken and as are the Lib Dems and others, but in the referendum it is true, people are very outspoken, people change their twitter profiles with a picture of in or out and are very happy to share the opinions. It is a very emotional and a very public one.

It’s interesting if you go back to when the Brits came into the European Union; there was a huge vote for it coming in, more than two thirds majority. This time at best the remain camp can hope for a slight majority in its favour. You perhaps would also be reflective of many others who started off saying you have to stay in the EU to being confused now, to perhaps even voting against it. How did your journey run?

Alec as I said, when I started out it was pretty obvious for me that remain is the answer and the reason quite frankly, as somebody who’s engaged in financial markets as somebody who manages money for clients, you know I always believe in the ‘follow the money’ kind of argument and it seemed pretty obvious from the beginning that if Brexit happens that the Pound would be under pressure for all sorts of obvious reasons, that perhaps some jobs would go, it would and I have a vested interest in all those things. I do own a property in Northwest London, I live in this country, so what little balance sheet I’ve got is being built up in Pounds and for those reasons to me voting with my own wallet, I wanted to stay in, also on behalf of my clients.

I have clients where I manage Pound portfolios, so the same thing is true and that’s where I started and then I started reading about it and I read everything that politicians say, what the economists say, what other commentators say. I watched some very good television programmes with Jeremy Paxman for example. You may have seen that programme where he unpacked all the bureaucracy and the cost of the EU and eventually the case becomes quite compelling to leave.

There are certainly strong arguments on either side. I’m not 100 percent sure that I’ve made up my mind as I sit here to be honest and if that sounds irresponsible or careless, it’s actually quite the opposite. It’s because I am taking it so seriously trying to weigh it up for myself on both sides of the debate. As I say it’s a complex topic. I’ve met a number of people that have been on a journey. Some of my colleagues, same thing, where they started on the one side and today it’s in their own minds pretty close and maybe not 100 percent sure yet what they’re going to vote.

Those who have been on the journey, is it similar to yours where they started off on remain and then moved to out or have there been some who wanted to get out of the EU and have now changed their minds and staying in?

I can’t comment for the general population. I can only comment for my small circle of friends and acquaintances and certainly for them I think the ones that have been on the journey have all been in the same direction. The people that were Brexit at the beginning are probably quite strong-minded in terms of their views focusing on things like the sovereignty argument and when you fixate on that then very little will convince you that we should remain. If you’re frustrated by the fact that a large percentage of UK laws are being made in Brussels and of course there’s a dispute about what the exact percentage is according to the Jeremy Paxman Programme, it’s more than 50 percent, then I think you will be cross enough about that and you will probably want to Brexit and not much is going to change your mind. You’re not going to be swayed by the economic factors.

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The other thing of course, which I think has frustrated me and it’s frustrated me from both sides but probably more so from the remain side, is if you look at all the statistics that have been quoted, the forecasts that have been made, what’s going to happen if we leave, I think so many of these numbers are so clearly made up. All the scaremongering that I’ve seen really doesn’t sit well with anybody who interrogates the numbers in the slightest and from that perspective, as I say I became quite frustrated with some of the remain arguments. As recently as two or three days ago when the front page of the newspaper was George Osborne saying he’s going to have to put up taxes and cut pensions when we Brexit. That just to me seemed so obviously like a scaremongering tactic that I want to vote the other way all of a sudden.

Well, they call it project fear.

Yes, that has been the case. Unfortunately, on the Brexit side we’ve had people like Boris Johnson who is a bit of a parody as a politician, leading the campaign and you have people like Donald Trump who when he makes statements he’s on the Brexit side as well, so the poster boys for the Brexit campaign, I haven’t even mentioned Nigel Farage yet, the poster boys have not been the most impressive individuals. A lot of people have called the Brexit Campaign the sort of Little Englander Campaign, so there are people who say I don’t want to be a Little Englander, I don’t want to be associated with Nigel Farage or Boris Johnson you know, with all his antics. From that perspective I think that’s been the biggest issue that the Brexit Campaign had at the beginning but I think people have moved beyond that and focused on the real arguments now.

The British are pretty informed. They have more newspapers per head of population probably than anywhere else in the world, they have a very strong media, and they like to know what’s going on. Just your sense from the people that you’re talking with and we published an excellent piece this morning from a lady from Bloomberg, an American who came here and spoke to the middle class in Luton of all places and came to a pretty strong conclusion that they would mostly be voting to leave the European Union. What’s your sense as you go into it now; given the opinion polls are all pointing that way?

I think that’s right but you know I think we have to recognise that the people that I meet in London, in Central London are probably not reflective of the general population that much. My own network is more sort of professional, city-based. I don’t know people in Luton or people of that ilk really and I’m reminded by your question of what I read in the Economist a couple of days ago. I don’t know if you saw the article about Cambridge and Peterborough? For those who don’t know Cambridge and Peterborough are tucked away in the same part of England.

They’re only about 50 miles apart, so it’s the same general part of the country and on balance Cambridge is very strong in, Peterborough is very strong out and the author of this article in the Economist went and spoke to people on the ground and he came to the conclusion that, and it’s very obvious when you look into it, he says, when you’re in Cambridge, the typical immigrant that you’ll meet is a master student that is undergraduate at one of the best universities in Continental Europe and comes to the UK for some postgraduate qualification, ends up maybe staying here, makes a contribution to the world of tech and the like and if you and I bump into that guy in Cambridge, you know we’re going to probably like him, respect him, respect his brain and his contribution and we’re going to have a positive opinion about immigration.

However, in Peterborough where there’s no University of Cambridge, I think there is a tertiary institution but it’s not of Cambridge’s stature. The typical immigrant you’re going to see is probably a labourer who is competing for the jobs of the unemployed, the minimum wage level and that leads to all sorts of emotional arguments that they’re stealing our jobs and they’re of a lower level so to speak and you will have a very different view of immigration and from that perspective you will be much less pro EU and the free movement of labour. I think your Luton example, Luton is probably a little bit like Peterborough, and Cambridge is a little bit like the part of London that I sort of walk around in for the most part.

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It is immigration in your opinion, is that what people are focusing their attention on mostly?

Some are. I think in my mind there are a few sets of arguments that matter more than the rest. The one that I tend to focus on and I addressed that five minutes ago is the whole economic imperative and what makes sense for the UK going forward, immigrating being the second sovereignty, I’ve mentioned the third. Therefore, for some people it’s very much about immigration. For me it’s not so much and maybe it’s because I’m an immigrant myself and I’m very thankful to have found an opportunity to make my life here and also I think I stand back from it and I say that the whole world has been influx for hundreds of years. America is a great country today and it’s a country that was built from immigrants and it’s because it accommodated those immigrants in the way that it did, immigrant’s land over there, they want to make a life better than where they came from, they’re ultimately productive, law-abiding, and it’s been very good for the country over hundreds of years.

If you look at London today, London is a city of immigrants. Those listeners who come to London and stay in a hotel, go to a restaurant, go to a shop, they’ll be hard-pressed to meet any Brit servicing them in any of those establishments that I’ve just mentioned. We’re very much a city of immigrants, immigrants that for the most part live together peacefully in harmony and the city functions, so I’m not anti-immigration but I do understand that it’s a very emotional argument especially at the entry level in a job market amongst the unemployed where people are prepared to work for the minimum wage and displace the locals.

The thing that is confusing though is the money, Betfair still has Remain or staying in the EU as comfortably the favourite so people are putting up to £40mn onto that result and usually if you follow the money it tends to be accurate particularly in betting markets.

Well, tongue in cheek; I’ll start by saying Alec, that betting markets do get it wrong. You know 12 months ago they were offering 5000 to one on Leicester winning the Premier League and that would have been a very good bet, so with 5000, the one coming through and making you money, maybe today two to one is not such great odds, but on a more serious note I think the reason that the betting markets are still favouring remain compared to the polls, which on balance now seem to suggest that we might be leaving is I think the difference between the two in large part boils down to the percentage undecideds or the uncertainty factor, so the polls, if you get asked the question you say yes or no, you get counted either as a yes or no but if you say I’m not sure I don’t want to answer the question, you get cast aside.

There is an undecided or an uncertain factor of between ten and 15 percent perhaps and history would suggest that amongst the uncertain, the majority of them will go with the status quo by the day that they make their cross on the ballot paper and therefore I think that’s what the betting markets are focusing on. They’re saying, listen leave maybe ahead. The Brexit Camp may be ahead marginally as far as the polls are concerned but if we add most of the uncertain, to it then more likely we will still stay. It’s not only Betfair. Betfair is probably the best example bemused that’s not bookies making odds.

The Leicester example I mentioned earlier, you couldn’t get 5000 one on Betfair. Betfair is a platform. Betfair are people like me and you betting against each other. That’s not a bookie deciding what the odds are, so that’s the real weight of money, so the Betfair odds are probably the best ones to focus on and ultimately as you say it does still seem more likely that we will stay. The one thing I’ll add is all of a sudden in the last 24 hours; let me go back a step, as recently as a week ago it looked pretty likely especially as far as the bookies are concerned that we would stay. In the last seven days there was increasing momentum on a daily basis.

Every new poll that came out suggesting that we might Brexit and then it started changing again yesterday with a tragic murder of the British Labour politician Jo Cox and markets may be heartless, they may be amoral as opposed to being immoral but it’s as if the markets interpret that as a sign that a lot of the undecideds will perhaps vote to remain in sympathy with the Jo Cox murder. She was a very strong campaigner for the remain side and I think people are looking at the tragic loss of life and saying well if that’s as far as some people will go to make their point then maybe we should stand up and vote the opposite direction. I’m not saying that’s a rational argument but it would appear that there may be such a movement.

Let’s have a look at the likely consequences. Clearly the markets are trying to hedge the bet one way or another. It is a close race. If the remain camp wins, if the EU vote prevails that Britain stays in the EU, what are the likely impact going to be on say Sterling and the UK share market?

If remain wins I think the consensus is that we will see a pretty quick bounce, certainly in the currency, perhaps more than the stock market. The stock market as well but I think the currency which today is trading at 1.42 was as low as about 1.40 a couple of days go.

That’s against the Dollar?

Against the Dollar, sorry yes, we’re sitting at probably 1.42, 1.43 today; I would guess that it would bounce back into the high 1.40’s which is where it was a few months ago when the campaign started. Share prices likewise, I think will benefit and of course some sectors will benefit more than others. The ones that are plugged into the real economy, the deals with Europe, I mentioned property prices earlier. UK Home Builders have been under tremendous pressure in the last few weeks and months. That’s a sector which could bounce back very quickly. Maybe not to the highs where we were a year ago because the property market is still expensive and we may never see those highs again in the short-term but I think you can expect a bounce.

What if the other camp wins, if the Brits decide to leave the European Union?

I think that’s the more interesting question. Let me put it to you this way, I think there’s a short-term answer and a long-term answer. I think the short-term answer is quite simply the inverse of what I said a minute ago. If remain wins, which means that if leave wins in all likelihood the Pound goes lower, it will go to the 1.30’s perhaps to 1.20 or something. I saw a report at the beginning of the year. I think it was either Goldman Sachs or JP Morgan, one of the two. This was written in January where they said that if Brexit happens the Pound could go to parity against the Dollar.

I think that’s extremely bearish. I’m not sure that it will go that far but I do think it will be weaker before it gets better in the short-term and then in the long-term, you know time will tell. I’m ultimately a glass half full person and I think we will work through all the consequences of a possible Brexit. Let’s assume it happens and I think the sun will shine again, I think markets will recover, I think the Pound will recover, but I don’t think the economic consequences are as dire as what markets fear when they respond overnight and we see these dramatic swings in both currency and in stock markets. So I think the longer-term impact will be quite sanguine and perhaps even positive if you speak to the people on the Brexit side they tell you this is the best thing for the country but it may take two or three years before markets realise that.

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Your own journey, you did say earlier that you very much remain. Are you looking at the long-term? Is that what’s confusing you?

Yes, and ultimately in the short-term it’s obvious to me as somebody who is operating in the markets that there’s all sorts of volatility that I’d rather not go through and maybe that’s where I started but in the end that’s a fairly short-sighted argument. You have to focus on the long-term. My life is here now. I have a daughter who is nine years old in a week’s time and I’m assuming that she will want to stay in this country for the long-term. She’ll make her own decisions one day but if you look at it like this you do take on a different perspective and then the short-term becomes a worthwhile price to pay for the long-term depending on how you see things.

In fact, in this regard I had a very interesting conversation earlier this week with Lord Young and listeners can go and Google him, Lord David Young of Graffham. He is an ex-politician in the Conservative Party but he was really not a career politician. He’s a businessman and he’s an entrepreneur. In the nineties he was the Chairman of Cable & Wireless and I only want to share the one anecdote, he said to me that if you look entrepreneurs, he’s very much a Brexit man today.

He’s a leave man and I say again, that’s a Tory, he was an advisor to number 10 Downing Street until a couple of years ago and his summary was that if you speak to entrepreneurs on balance most of them will be in the Brexit side because entrepreneurs have a long-term perspective on their companies, they’re going to run it for the rest of their lives, they may leave it to their children so they’ve got a multi-decade perspective and from that perspective Brexit is probably the best thing according to him.

He says however, when you look at captains of industry the CEO’s of the last corporates who sign a letter in the FT, 300 of them, saying that we should remain, he said they have a vested interest. Most of them have five to seven-year view where all the share options are going to invest. They don’t want don’t want short-term volatility, they want to maximise the share price in the next five years, make as much money as possible and run for the hills, retire comfortably and that’s maybe oversimplifying the case but I think it does summarise the sort of two camps from a business point of view. The short-term, the five to seven-year view, Brexit may have turbulent consequences but in the longer-term I’m certainly not that bearish about it.

“This is a nation of shopkeepers” as Bonaparte famously said, so maybe the shopkeepers are going to prevail in the end?

The entrepreneurs you mean, the ones that said we should Brexit? Perhaps; there is of course a counter argument. I need to say this as well. I mentioned Lord Young, I saw, I won’t mention the name but a couple of weeks ago I met a very interesting entrepreneur as well who is operating in East London, not East London close to Port Elizabeth but East London close to Central London over here and he’s in that part that they call Silicon Roundabout and he’s in the co-working space industry where they’re creating office space for young starter businesses, mostly in tech and in media and the creative sector and this is not an entrepreneur, this is an entrepreneur who has made a lot of money who is in it for the long haul and for him it’s very obvious we should be in.

Why? Because his business model is based on the free movement of talent, you know the typical guy who comes and rents space from him is a techie from Rome or from Athens or from Elsewhere in Europe. From elsewhere in the world as well but certainly lots of them from Europe and from that perspective as an entrepreneur he wants to be in, so I think it’s over-simplified to say that entrepreneurs want to be out. A lot of them do but depending on what you do perhaps the opposite applies.

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You know the British people better than most. You’ve lived here a long time. You are British yourself. The perception one gets from outside is that these are, that Britain has the benefit of an excellent education system, so they’re smart people. They’re extremely innovative if you have a look at the inventors through the centuries many of them come from this little island. They also are pretty hard-working but they’ve got life quite easy at the moment. They have structures that came subsequent to the second world war that have made the incentive to get out there and use those inherent talents that the British possess, which one would assume would be beautifully positioned for the fourth industrial revolution, but they aren’t actually applying them the way that they should. Would a Brexit not change all of that?

Perhaps but there’s also an argument that says I think that the whole migration sort of debate that we’ve already addressed to some extent, we spoke with some inward migration. There’s also lots of outward migration. There are lots of Brits that live in Continental Europe. I’m not talking about the retirees and the Costa del Sol; I’m talking about ones who follow the opportunity as far as new work is concerned, whether it’s an island or on the continent itself. There are millions of Brits that have done that already, so when you say that they’ve had it pretty easy, that is right but I think the world we live in and I think I’m an example and perhaps you’re an example Alec, that you know people for their own reasons, they follow the opportunity to where it is and sometimes it comes with a bit of a short-term personal trauma because it’s upheaval.

You’ve got to remove yourself from your comfort zone but I think we’ve seen a lot of that and once again I think that’s a function of the world we live in and I think if the opportunity is in China then perhaps that’s where my daughter will end up one day and I would love to have her close to me but maybe the opportunity is in China and that’s where she will have to migrate to. So yes a Brexit may be the catalyst for that but I think within the context of a single Europe and UK being within that single Europe there is opportunity for Brits to move around in Europe and to go and follow the opportunity as well.

The point being that the status quo in this country is pretty comfortable whereas for the fourth industrial revolution, that status quo is going to get shaken up. The status quo in Europe is not really what you would like to apply in this country if you’re going to go into an age where everything is going to be different so sometimes it’s better to be the master of your own destiny than maybe having someone who lives far away and with other priorities making the decisions. Is that what the conclusion you came to?

I think you’re referring to the sovereignty actually. You don’t want people in Brussels sort of making decisions that will affect you on the ground over here. The famous Boris Johnson example about how straight the bananas must be, so from that perspective yes, I do think that it is ultimately a very relevant factor. I am shocked by the fact that there are a number of laws that are made by people that are ultimately not even, I don’t consider them a representative myself. A member of the European parliament, I’m not sure if he was elected, I can’t remember voting in such an election ever but those people sit in the European parliament over there and they made laws or they contribute to laws, so yes from a sovereignty point of view I think that’s one of the most compelling factors to want to vote on the Brexit side but you need to balance that with all the other arguments.

Deon Gouws is the Chief Investment Officer at CREDO.