Investors afford a substantial premium to certainty. They have always been happy to pay for having a high probability of what is likely to happen in the future. It makes planning easier and enables more confident bets. It’s also a reason why companies operating in the developed economies enjoy better ratings than those focused on more volatile emerging markets.
But as Quentin Wray reminds us in today’s contribution, geopolitics has made a massive comeback in the First World, shaking some long held assumptions. A perspective which holds some important implications for wealth creation.
Quentin writes: “When I was at university one of my digs-mates lost the whole house’s rent on a single card. There were 11 of us in the house at the time and this wasn’t an insignificant sum of money. Until the UK’s latest general election this had always ranked as the dumbest bet I’d seen first hand.
___STEADY_PAYWALL___
Of course, in both cases, if the bets had paid off – as they perhaps should have, based on the odds – I’d be talking about audacious perspicacity rather than stupidity. But that’s the way it goes, and, as they say, never bet what you cannot afford to lose.
Throwing away a working majority and a weakened opposition at war with itself in an election you didn’t need and nobody wanted in the hope that you’d wind up with a bigger majority and an opposition even more at war with itself was a bet Theresa May couldn’t afford to lose. Yet she took it and so, rather than talking about Brexit delivering the best deal for Britain we’re potentially looking at merely securing a least-worst outcome.
In just shy of two years the UK will no longer be a part of the European Union. And despite all the bravado of the hardcore band of Brexiteers who engineered the break from the world’s largest and most prosperous economic bloc, it is clear nobody has too much of a clue about what must be done.
This is not that surprising. For 40 years the UK was able to outsource its negotiations to a bunch of technocrats in Brussels and simply veto the outcomes they didn’t like. A bit like a toddler at the dinner table who can determinedly shut his mouth until presented with a food option that meets with his approval.
Negotiating is hard anyway, striking a deal that pleases everybody is impossible. Yet this is what an inexperienced group of trade negotiators must do or risk it falling at the first parliamentary hurdle. Walking away with no deal is now impossible because the Tories won’t be able to force it through the House.
In effect, what Theresa May and the Conservatives have done is turn the UK into a de facto emerging, rather than developed, economy. Investors use the phrase to mean a place where everything is skewed by the fact that politics trumps economics whereas in a traditional developed country, the role of politics is mitigated by institutions of state which can operate fairly independently of the antics of the politicians that surround them.
Developed countries, where certain things have been able to be taken as read by investors for decades, are now finding themselves held hostage by seismic ructions to their political bases, and their markets are starting to behave accordingly. Investors would be foolish to ignore this development.
The sky hasn’t fallen as the Remainers argued it would, and I think it is unlikely to, but increasingly the narrative, even in ardently pro-Leave publications such as The Spectator, is turning to how it is ok that sovereignty comes at a cost.
Perhaps they’re right, but this is a far cry from arguing that being free to negotiate our own deals will make us all richer. As is always the case, this cost will be borne by investors, businesses and households and not those who made the mistake in the first place.
Unlike my friend who lost the rent, the government cannot run to mom and dad to sort out its mess.”
As always, Quentin raises some pertinent issues. Then again, for South Africans, the political ructions elsewhere look decidedly pedestrian. On yet another day when Parliament promises more drama than a late afternoon soapie, the people of the South would surely delight in a little bit of “boring” now and then.
