John Chatfeild-Roberts: The folly of building an investment case around Brexit


The EU referendum starting gun was officially fired last month, with David Cameron announcing 23 June as the date of the vote. To remain in a “reformed EU” is now official Government policy, while the baton to lead the “leave” campaign has been picked up by Michael Gove, Chris Grayling and, of course, the mercurial Boris Johnson.

The political bricks immediately started flying. Sterling weakened and is at its lowest level against the US dollar since 2009, while rating agency Moody’s said the UK’s credit rating was at risk.

All this happened within 72 hours of the referendum date being announced – and we still have another three months to go before the vote. Until then we will be subjected to facts, counter-facts, information and misinformation, impassioned pleas, political and emotional rhetoric and scaremongering.

Little will be balanced, much will partisan; the polls are unreliable predictors of the result. Building an investment case purely around Brexit, given the uncertain outcome, is unwise. Investors should continue to invest in a diversified portfolio of high-quality assets and adjust their risk as the outcome becomes clearer.

Meanwhile, just three months on from the December interest rate rise in the US there seems to be an accelerating acceptance developed world economies should have rates close to zero, or even negative.

Indeed, even the Federal Reserve, which recently scaled back its guidance on rate rises for this year, has told US banks undergoing their annual “stress test” of financial resilience to model the sensitivity to negative rates. This is not to say negative rates will happen in the US but the fact it is being contemplated and modelled under instruction from the central bank in the possible event of a US recession is in itself highly revealing. This for the world’s largest economy, which is still growing at a rate of 2.5 per cent.

So if the prospects for rates to substantially rise further over the course of this year seem diminished it is largely down to three factors, all of which are inter-linked. These are the recent behaviour of world markets, continuing anxiety over the deflationary effects of weak commodity prices (oil especially) and the slowing rate of global economic expansion.

Despite this general outlook, the oil price does seem to have stabilised, at least for the time being. At the time of writing, Brent crude is $40 per barrel, up from a low of $28 in January. Following the impasse among producing nations, including within Opec itself, about how to deal effectively with the 75 per cent fall in the oil price from its peak, the industry’s tectonic plates have been gradually shifting.

In February, Russia, Saudi Arabia and Venezuela met in Qatar in a closed meeting. While the outcome was limited to agreeing merely to maintain output at the January levels, the very fact of being in the same room and reaching some kind of agreement was significant.

Relations between Russia and Iran, not exactly bosom buddies over the past 35 years, have been thawing of late. They are cooperating militarily in Syria and Russia has extended a $5bn loan to Iran to develop its nuclear energy programme. However, there is absolutely no love lost between Saudi Arabia and Iran on virtually any level (they are, after all, on opposing sides in the civil war being fought in the Yemen). For Saudi to negotiate with Russia, a country moderately friendly to Saudi’s enemy, should not be lost on us.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team