Category Archives: Great Britain


Is BREXIT Just Noise?

  • Markets fell on Friday but they are exactly where they have been in the last weeks.
  • BREXIT is noise, investors should focus on slower global growth and fragile financial systems.
  • The market is still overvalued in historical terms but there are some opportunities.


An avalanche of articles since last week’s BREXIT is forecasting terrible things for the world economy and financial markets especially. Most focus on the huge declines stock markets saw on Friday, but let us first take a closer look. The UK FTSE 100 index fell 3.15% to 6,138 points on Friday, but all-in-all it was a positive week as last week started with the FTSE at 6,021 points.

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Figure 1: UK FTSE 100 index in the last month. Source: Bloomberg.

Of course this is only the nominal decline. As the pound declined by 9% toward the dollar, FTSE losses for U.S. investors ended up at 13% in total on Friday.

The S&P 500 also fell 3.59% on Friday, but this was mostly due to the appreciating dollar. As the dollar appreciates, U.S. corporations see their international earnings deteriorate as more than 30% of revenues comes from abroad.

figure 2 dollar spot
Figure 2: Dollar index spot. Source: Bloomberg.

But again, the dollar is just back to where it was at the beginning of the month and the S&P 500 to where it was exactly one month ago on May 23. The point of this introduction is to make investors aware of the difference between noise and real structural significant influences.

What’s Important for an Investor and What’s Just Noise

In the BREXIT aftermath you will be bombarded with various crazy headlines like “FREXIT” (France leaving EU), but don’t let this move your focus from the important things. The important things are that the BREXIT will for sure have a negative impact on the already negative trend of slowing global economic growth. The World Bank has already revised its global growth expectation downwards from 2.9% to 2.4%. The BREXIT will further lower the amount of investments in and from the UK and consequently, Europe. This might push global growth even lower and keep growth in Europe subdued.

figure 3 real gdp growth
Figure 3: Global, Europe and advanced economies real GDP growth expectation. Source: World Bank.

Slower global economic growth and activity will have an impact on every aspect of economic life. But, as usual, central banks will do their best to keep things stable by adding more liquidity. The European Central Bank issued a press release immediately after the BREXIT vote stating that it “stands ready to provide additional liquidity, if needed, in euro and foreign currencies.”

This policy of constant liquidity adding by central banks has been working well in the last seven years but involves some risks. The major risk is that markets change their perspective on monetary policy as an important enough factor for market stability. As soon as central banks become unable to protect the markets with their added liquidity there is nothing to stop the markets from a free fall. Also, the increased liquidity provided by banks with no economic traction would spur inflation. Such a scenario could bring a rare economic situation called stagflation: high inflation and economic stagnation.

The second risk is also related to monetary policy and BREXIT. BREXIT being the cause and monetary policy being the reason. The low interest rates and high liquidity has brought high levels of debt globally and uncertainties about whether the central banks are going to be able to keep things stable without spurring too much inflation in an environment of continuous abundance of liquidity. This risk influenced most European banks to fall between 10% and 15% last Friday, but this was only the tip of the iceberg as the above mentioned reason lowered their share prices by about 50% in the last year.

figure 4 European banks an U.S.
Figure 4: European banks stock price in last two years. Source: Yahoo Finance.

UK Barclays, German Deutsche bank and Italian Intesa all fell by about 50% or more in the last year. The best performing bank in the above chart is Wells Fargo which has fallen only 20% in the last year. This weakness in the financial sector signals that the provided liquidity is still keeping the markets stable, but the decline of bank shares indicates that the markets are not as healthy as they used to be.

The most important thing of all for corporations and their stock prices are, of course, earnings. The stronger dollar will undoubtedly lower corporate earnings and make the already historically high valuations look even more overvalued.

figure 5 sandp multipl
Figure 5: S&P 500 PE ratio. Source: Multpl.

As the above figure shows, the S&P 500 PE ratio has only been higher than the current level on a few occasions. Recent historical examples of higher or similar PE ratios are the 1960s bull market that resulted in a decade long 1970s bear market, and the dot-com bubble and bust. The 2009 spike is related to the 2009 crisis that lowered earnings and not to market overvaluation.

Conclusion and What Can Be Done

In an environment with huge liquidity, high valuations and uncertain economic prospects, there are some things an investor can do. If the high liquidity ignites inflation, it is always good to be exposed to assets whose quantity is fixed. Such assets are commodities. Precious metals in particular as their value increases with economic turmoil. All other commodities should benefit if inflation is ignited and the global economy continues to grow.

An investor can look for companies with low PE ratios and stable non-cyclical revenues, like utilities, communications or consumer staples. It is not easy to find companies like that in this overvalued market but there are a few—like AT&T (NYSE: T) or Southern Company (NYSE: SO)—that look attractive with their PE ratios below 20 and dividend yields north of 4%. A PE ratio below the average does not mean that the price of those stocks will not go down in a bear market.

In any case, investors should brace for volatility ahead as negative economic repercussions keep constantly coming up. Now it is the BREXIT, not so long ago we had the Chinese slowdown crisis in August 2015, low oil prices in January 2016 and as more such things are bound to happen in the fragile, overvalued, highly liquid markets, every investor should prepare for volatility.


Is Global Recession On Its Way? Brexit May Be A Warning Sign…

  • Global GDP growth rates are stalling even with increased monetary stimulus.
  • There are several potential recession triggers.
  • It is important to assess the risks a portfolio runs as no one can know when a recession will come, but eventually it will as it always has.


The main FED goals are sustainable economic growth and full employment. In order to achieve those goals, the FED has decided not to increase interest rates as the economy is still relatively weak and employment has been slowing down. Not only that, but the expectation of future interest rate increases has been revised downwards.

This brings several consequences. In case of an economic downturn, which would be completely normal as we have not had one in the last 7 years, the FED has no maneuvering space left to help the economy as the interest rates are still at recession levels.

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Figure 1: U.S. GDP growth to date. Source: Multpl.

As the last recession was 7 years ago and every economy is cyclical, we should not be surprised if a recession comes along. No one can know when this will happen as recessions always come unannounced, but we can take a look at the risks that can trigger a recession and the consequences of it.

Potential Recession Triggers


A vote in favor of the U.K. to leave the EU might influence some longer term market disruptions as London is the European financial center. The U.S. Treasury Secretary recently issued a warning stating that the global economy would be damaged if the U.K. leaves. The recent polls show a scary shift toward a leave.

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Figure 2: Brexit polls. Source: Financial Times.

The ‘remain’ has always been greater than the ‘leave,’ but it seems that the undecided are turning toward a leave. Next week will be an interesting one as we will see the long awaited Brexit vote confirmed, be it a leave or a remain.

Another Bad Summer in China

Last summer we had the first meaningful stock market fall in the last 7 years as the Chinese stock market precipitated on weaker Chinese growth.

3 figure China GDP growth
Figure 3: Chinese GDP growth per quarter. Source: Trading Economics.

As China is increasing its debt levels in order to force economic growth, the long term perspective is one where if all goes well, China will have stable growth levels but any global shock like the above Brexit might influence further slowing down and a global deflation spiral.

4 figure china debt to gdp
Figure 4: Chinese debt to GDP. Source: Trading Economics.

Debt usually means trying to hold on to the status quo until there is liquidity. The above increases in Chinese GDP show that China is desperate to keep its growth rates as it might implode without high growth rates.

As China and all other economies are dependent on global trading, any indication of global isolation would quickly spur discomfort into the market and this brings us to the next possible trigger.

U.S. Isolationist Tones

Currently Clinton is ahead in the polls but the Brexit example shows how we cannot bet on polls. If Trump’s isolationist rhetoric is more than just election tactics this could have a severe impact on U.S. trade and global economics. History has proved that any kind of isolation is detrimental to economic growth and wellbeing, and the current high standard we are enjoying is a result of global integration increasing its speed in the last three decades.

Global Monetary Policies Imbalances

With the FED slowing down, this is less of a concern as the higher U.S. interest rates would have strengthened the dollar and lowered U.S. exports. Everything produced in the U.S. would have been more expensive and U.S. corporate earnings would have been lower in dollar amounts.

Countries like India or Brazil, where interest rates are relatively high, are still not such a big influence on the global economy, but an economic rebound or inflationary pressure in one of the global economic pillars like Europe or the U.S. would trigger worldwide financial instability.

5 figure global interest rates
Figure 5: Global interest rates are at historical minimums. Source: Trading Economics.

The event of such a situation is highly unlikely especially after the FED has slowed down with its interest rate plans and the situation in Europe is not indicating economic exuberance.


Europe is the next risk factor for global markets. Even if we haven’t had a ‘Greek’ moment or a bank crisis for a while as the European economy is growing, that growth is still not stellar and has already peaked.

6 figure EU growth
Figure 6: European GDP growth. Source: Trading Economics.

EU growth has reached 2% in 2015 but is already declining and sits at 1.8% currently. This is a good number for Europe as the 2012/2013 recession is not far away, but the growth is fueled by increased debt levels and the non-performing debt ratios are scary for EU banks.

6 figure non performing loans
Figure 7: Non-performing debt ratios for EU banks. Source: European Central Bank.

For comparison, the average U.S. non-performing loans are at 1.67% which is much lower than the EU 7%.

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Figure 8: U.S. non-performing loans. Source: Statista.

Therefore, Europe not only has the ‘Brexit’ issue as a potential destabilizer but also bank fragility and the fragility of the whole economy.

Understanding of Risk

The last risk related to global markets is the assessment of risk investors have. With yields at historical lows, investors might be losing the perception of risk, especially as central banks run to save the markets as soon as any decline is anticipated.

A shift in the perception of risk might be the biggest risk of all as we have seen that after the FED decided to keep rates steady and lower for a longer period of time, the DOW index declined and did not, as usual, increase based on continued FED stimulus.


The scope of this article is not to be the chicken little but to objectively assess real risks to your portfolio. A recession would be catastrophic at this moment as central banks are out of firepower. Maybe they can keep markets at a permanent high level with low interest rates, but there are several structural and cyclical longer term forces that come into play here and cannot be influenced by monetary policy.

The U.S. is approaching full employment, corporate earnings and investments have been declining for a while even though interest rates are still low. As we already mentioned, we cannot know when any of the above described risks will kick in, maybe even next week with Brexit, or not in the next few years.

Eventually a recession will come, as it always does, unannounced and surprising, nobody knows when but it is good to think of how risky is your portfolio in relation to that and if maybe the same returns can be reached with less risk.



Brexit – Much Ado About Nothing

  • The Brexit referendum has already caused trouble for the UK economy with slower growth and a falling pound.
  • Fortunately, polls show that the vote will be to stay in the EU.
  • Traders might take advantage of the situation as the pound still has lots of ground to recover to pre-Brexit levels.


It seems that Shakespeare is still very popular in the UK as the country is staging a referendum on whether or not to stay in the European Union (British exit = Brexit). This article is going to research if Brexit is just a comedy and much ado about nothing, or if there are some real threats to an exit vote.

The Brexit possibility was born when, in order to get more votes from Euro skeptics, the current UK prime minister David Cameron promised in the last elections that he would stage a referendum on whether the UK should remain in the EU or not if he were to be reelected. At that point is seemed like an innocuous issue, but it has now evolved into something pretty serious as it already has important consequences for the UK economy.

Current Situation and Influence on Markets

The first direct impact of Brexit fears is related to the British pound (GBP), once considered a global currency is currently moving like an emerging market currency.

1 figure usd GBP
Figure 1: USD per 1 GBP for the last 5 years. Source: XE.

The GBP declined from a high of 1.71 USD for 1 GBP to the current 1.44 in less than two years. A weaker pound should be good for the economy but that is not how the British economy is set up as it is very oriented to foreign investments. Since the last elections the British GDP has been growing but at a constantly slower rate.

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Figure 2: Gross domestic product – quarter on quarter growth. Source: UK Office for National Statistics.

One reason for the slowdown is that the UK is losing some foreign investments as the uncertainty with its political direction grows. This uncertainty quickly affected luxury London real estate, which was for a long time the Mecca for rich global investors that parked their money in expensive London flats but that practice has been fading. But there are several other potential threats to a Brexit than only luxury real estate.

Potential Situation in Case of a Brexit

As the Brexit is a purely political and not so much an economical issue, the consequences of a Brexit could be very detrimental. The issues that ignited the whole situation are, according to the BBC, the following: the ability of immigrants to send child benefits back to their home country, migrant welfare payments, keeping the pound, protection for the City of London as the financial center of the UK, control of their own borders, and savings on EU fees. On the other hand, the reasons for the UK to stay in the EU are the following: easiness to sell things in Europe, young and keen to work immigrants give a boost to the economy, and that the UK status in global politics would be damaged by the UK not being in the EU.

The Bank of England warned that the UK might go straight into a recession if a Brexit is voted in with a depressed pound and a rise in unemployment. The situation on the stock market is not of the rosiest either.

figure 3 FTSE
Figure 3: UK FTSE index. Source: Bloomberg.

The UK market chart does not look that bad with a loss of 14% in relation to the April 2015 high but when you add the depreciation of the GBP in relation to the dollar you get to a loss of 22%, and that shows how important it is to stay in EU for the UK. The losses have been larger but both the pound and the FTSE have recovered as Brexit polls indicate a vote to stay in the EU.

Current Polls 

The current polls are getting more positive as 46% of UK voters want to stay in the EU.

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Figure 4: UK Brexit polls. Source: Financial Times.

Traders might take advantage of the situation as a vote to stay is getting more likely and the pound has still lots of terrain to regain in relation to pre-Brexit levels.


Shakespeare’s comedy Much Ado About Nothing is a perfect match for the explanation of the situation as a Brexit would be detrimental to the UK economy and future growth prospects and is not logical to outside viewers. The world is becoming more of a global market place where historical imperialistic attitudes do not fare well and have terrible results for the economy of an isolated nation. The hope is that the British people understand that and do not vote themselves out of the global economy, focus on real growth and production and leave the political bickering, rumors and intrigues to comedies, like it was the case in Shakespearian times. In the meantime, traders have a good opportunity to make some money by grasping the currency movements related to the referendum.