Investing in imponderables — what to do if Carney’s dire warnings come true

There seems to be as many possible ways that things could pan out over the next couple of years as there are companies in the FTSE 100: what should investors do?

Article updated: 30 November 2018 10:00am Author: Michael Baxter

The governor of the Bank of England was asked to outline what might happen in the event of the worst possible scenario — quelle surprise, the picture Mark Carney painted was not pretty, not quite fire and brimstone, but pretty awful. And now he is accused of peddling project fear.

Those who question Carney’s credibility should bear this in mind: right now, he probably understands the UK economy better than anyone else in the world — he knows more than you, and a lot more than me; so, if he really is as inept as critics say; what does that say about the rest of us?

Personally, I don’t think the UK will leave the EU. I think there will be a second referendum with a three‐way vote: May deal, hard Brexit and change mind about leaving, with voters invited to give a second choice, which will be counted in the event that no one option gets more than 50 per cent of the vote. And the UK will vote to stay.

But, while I think that the above scenario is more likely than the other options on the metaphorical table, my certainty is not great. I would bet a couple of quid on it, but no more.

Although I would say that hard Brexit is less likely than either Remain or May proposal, it’s a close call. While I would put the odds of the UK staying as a little greater than one in three, I think I would put the odds of hard Brexit at a little less than one in three.

But then I am not sure I can recall a period of greater uncertainty.

In 2008, I was pretty sure things were dire, now I merely think that; but there is some reason for optimism.

It is not just Brexit: the G20 is meeting and has there ever been more disharmony? Well I guess there was more disharmony in the late 1930s, but we didn’t have a G20 then.

If we get some kind of communique out of the summit it will pare back on warnings about
protectionism and climate change.

In short, it will ignore the two more pressing problems in the world.

But hey, at least the oil price is down. We have got that nice Crown Prince Mohammed bin Salman to thank for that. Oh, and also his friendship with President Trump. Let’s hope MBS isn’t arrested while in Argentina, as has been threatened, that would send the oil price into unpredictable territory.

Sometimes I think the G20 would be better off without the US.

Come to think of it, we might be better off without Russia too, and indeed all countries with Far Right governments.

Still there is always New Zealand — oh, shoot, New Zealand isn’t in the G20.

My point: it’s a mess. Actually, I am a fan of the G20, not to mention the UN, WHO, WTO and yes, the EU too. Such institutions have helped keep the peace these last 70 years.

So what should investors do?

Hard Brexit
In the event of a hard Brexit; and in the event that Mark Carney’s dire predictions pan out, just remember the FTSE 100 offers lots of international exposure, which, in the event that the pound falls, is a good thing. This did indeed do well after the first EU referendum.

And oddly, recent falls withstanding, the markets in any case seem to like populism.

Remain or May deal
On the other hand, if hard Brexit is avoided, sterling may rise sharply — especially if the UK decides to stay. In this outcome, investing in companies that target the UK consumer may payoff.

Interest rates
The future of rates is harder to call. Capital Economics reckons that if we see a hard Brexit, the Bank of England will ignore the plummeting pound and cut rates. I am not so sure, I know the Bank did this after the last referendum, but there is a limit — and it may depend on how much the pound falls.

Theoretically, if the UK votes to stay, rates will rise.

What should investors do?
Given all this uncertainty, I guess the best thing investors can do is keep a cool head, go for quality stock, strong brands.

I am still very much of the view that technology may help us get out of this mess, so investors may want to heed some of the advice in this excellent piece by Sheridan Admans.

But I would also say, keep some powder dry. Opportunity may emerge over the next few months, make sure you can take advantage of it.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.