A Note on Brexit and the Markets
This is a guest post from Garvin Jabusch, Chief Investment Officer of Green Alpha Advisors, LLC
The UK has voted to leave the EU, and global markets, for today, are way down. But what, fundamentally, does it all mean? Why does a Brexit equal market turmoil? Will Brits stop all commerce, quit consuming, and cease all import and export activity? Will Europe? Will global trade falter?
No, the Brexit will cause none of that. And yet, some economists do see some declines as a possible outcome. As reported by the Economist, “the central estimate touted by George Osborne, the chancellor [of the UK Treasury], is that GDP may be 6.2% lower than it would otherwise have been by 2030, an annual cost that he reckons works out at some £4,300 ($6,000) per household.” The “than it would otherwise have been” is code meaning the UK economy will still grow between now and 2030, but perhaps a bit more slowly than if it had stayed in the EU. The UK Treasury’s “central” scenario is based on the assumption that the UK’s future trading relationship with Europe will consist of “membership of the European Economic Area (EEA), like Norway; [or] a negotiated bilateral free-trade deal similar to Switzerland’s or Canada’s.” It’s worth noting that, despite never having enjoyed membership in the EU, Norway’s, Switzerland’s and Canada’s economies are among the world’s best. I know, that’s merely a correlation, but still, it gives an idea of the economic capabilities of nations currently living in the UK’s likely near-future scenario.
It’s also worth keeping in mind that events like debt crises, fiscal cliffs and market bubbles will always capture headlines, but, unless they represent the exceedingly rare event that really does change the trajectory of the world economy, they are short lived. Remember last summer’s market freak out during the Greek debt crisis? Forgotten by fall. The Fiscal Cliff selloff in response to the idea that the U.S. might default on its obligations? That hammered the markets in November 2012, but the reversion to the “norm” took days, and the event is barely a blip on the 5-year S&P 500 chart if you look today. Even the horror of 9/11 didn’t impact markets for long. According to CNBC, “Stocks plunged the day the markets reopened on Sept. 17, bottoming out with a 11-percent loss five trading days later. Yet by Oct. 11, the S&P 500— as well as NYSE trading volume — were essentially back to pre-attack levels.” CNBC summarized the market effects of that awful day thus: “September 11: National Scar, Market Blip.” So while events like the Brexit may increase uncertainty for short periods, real economic fundamentals do prevail in the long-term.
As economist Jeremy Grantham has written, markets can be “depressed by a very obvious reason: the cloud of negatives, which generally and surprisingly have historically had very little effect individually on the market, but apparently do depress “comfort” when gathered into an army of negatives. So, whenever the negative news cools down for a week or so, the market tries to get back to its “normal” level, which is about 20% higher.” Markets hate uncertainty. When they are reassured that the status quo won’t actually change much, they revert to the norm.
Meanwhile though, the world is in fact facing far larger, more dangerous, trajectory changing threats: climate change and resource scarcity. The World Economic Forum has recently found that “water crises,” “failure of climate change mitigation and adaptation,” “extreme weather events,” “food crises,” and “profound social instability,” in that order, are the global economic risks of highest concern for the next 10 years. Notice the unifying theme of these top five risks: “climate issues were the risk factors most likely to influence other risks and thus have the greatest potential impact.” How great an impact? The European Systemic Risk Board has warned of economic “contagion” if a global move to a low carbon economy “happens too slowly or too late.”
Fortunately though, the solutions to some of these larger, more meaningful risks that confront us all are booming. Rapidly falling prices for both solar and wind energies, renewed U.S. ITC tax breaks, and the Paris climate deal among other things are fueling record solar and wind sales worldwide. Yes, solar stacks have not fared well recently, but declines are “more about perception than true fundamentals,” according to an analyst at S&P Global Market Intelligence, because the fundamentals continue to improve, given both low equipment and production costs and surging demand. “But that’s not currently reflected in the share prices.” So at the moment many solar and wind equities are a compelling opportunity. This is well supported by the fact that overall renewable investments have been growing, with 91.6% of all new electricity generating capacity in 2015 globally coming from wind and solar. Thus, a fissure must be forming in energy investing, and solar is poised to break from the pack, providing savvy investors with a remarkable opportunity to invest in the Next Economy—and the future of the planet.
The transition to the next economy now has gained so much momentum that earlier this year Morgan Stanley advised in a report, “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels.” Powerful stuff, especially coming from a venerable, old bank that still has a lot of investments in fossil fuels.
So, to summarize:
Brexit: short term risk and instability, that comes with a short-term buying opportunity.
Climate change: risk of existential instability, but with the corresponding largest economic opportunity in history.
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