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Market Comments July - The Highs & Lows in the UK, The Story of Astérix

“Ils sont fous, les anglais” In difficult times, we find solace in the classics. In our case, we like to have a look at Astérix. The results of the referendum on Brexit came as a big surprise to the markets. Economic and financial scenarios on a life after Brexit had made the rounds and no one believed that voters would actually opt for such disastrous consequences. Either the forecasts were wrong or voters will feel sorry soon enough. The political chaos in Britain points to the latter. The GBP dropped some 15 % on the assumption that the UK will remain on its own. Equity markets initially dropped on the news and then companies with global operations made back the lost ground bringing with it a positive bounce for the FTSE 100 while purely domestic UK companies continue to be valued substantially lighter than before on the bleak economic future of the island.

What now? The harsh economic predictions circulated before the referendum are likely to bite soon enough: - At least 2-3 years of uncertainty – one year for Britain to invoke article 50 and 2 years of exit negotiations – followed by mire time to conclude trade deals and many more EU -Britain agreements - Secession forces at play in Scotland and Northern Ireland will keep London occupied domestically

- Economic slow-down, even recession, are likely with higher unemployment and less tax revenues - Current account and fiscal deficit which needs to be financed before any promised electoral largesse can be honoured - Companies gradually transferring business to the Continent in light of the bleak economic outlook with a loss of revenue and jobs. There are several possible scenarios we can identify: - The UK applies a Norwegian style relationship with the EU. This still requires the UK to contribute to Brussels in return for the free movement of goods, services and …workers. This may be hard to achieve as the Brexit campaign has been argued mostly long immigration themes. - The UK clearly leaves the EU and fulfils its political remit. It becomes the island of liberalism and laissez-faire capitalism / low corporate taxes, free/wheeling financial centre and little social protection / just off the Continent´s coast which will – according to some – sink under a burden of protectionism and Colbertism. That might be difficult to explain to those who voted for Brexit as it would strengthen those that the governments have supported most in the wake of the most recent financial crisis. The UK then invariably turns much more towards the Commonwealth for its economic and financial future. - Or, we will face a Greek drama. EU governments have a history of asking their constituencies and later using the negative vote as a bargaining chip with Brussels. We may see the UK associated with the EU in some form and this explains the relative calm in the financial markets. No matter which scenario pans out, markets do not like uncertainty. With so much uncertainty on the fate of the UK, investments will be shelved and investors will look elsewhere to put their money. So should you until the dust settles. However, the sky is not going to fall on our heads and there will be better times ahead. How to invest in such a market? Our current preference is for US stocks. US growth seems to be confirmed if we go by the data on job creation in the US that we saw on Friday. Europe is under the spell of a potential banking crisis in Italy which does not bode well for coming Summer break over here. Things will look better once the Central Banks support the market some more. Let us wait for Getafix to plays his magic! For specific recommendations on the impact to GBP assets, please do not hesitate to contact us to set up a time to discuss your personal affairs.

Zurich 11th July 2016

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