Brexit reaction: Gilts, credit, borrowing opportunities, recession concerns
0Last week’s referendum on membership of the European Union saw Britain vote narrowly to leave. Political turmoil has followed, currency markets have punished the pound while the yield on 10-year Gilts hit another low. Our commentators offer their immediate assessment of the fall out from the vote.
Photo: © European Union 2016 – Source : EPAPimages.
Rob Whiteman
Rob Whiteman
Chief executive, CIPFA.
“The decision to leave has been made but Britain remains geographically part of Europe and we must continue to work closely with our neighbours to protect our economies and strengthen public services.
“We urge against knee-jerk reactions, the Government must carry out detailed analysis of public finance before making decisions. Many councils, hospital and schools are already on the brink. They would not easily withstand shocks to their funding.
“During the transition to a new Prime Minister and negotiations to leave, public bodies’ that receive European Structural and Investment funding in particular, will seek assurance that this funding will be maintained.
“CIPFA will work closely with the Government as needed to help ensure as smooth a transition as possible with advice on the complexities to be worked through.
“And we will keep working in Europe. The world economic march to globalisation over coming decades will continue and CIPFA will be pleased to support UK, EU and international public bodies to learn from each other to meet their challenges.”
Robin Creswell
Robin Creswell
Managing Principal, Payden & Rigel Global.
“Whilst not expressing a view on the outcome, of the many possible changes and opportunities that arise from Friday’s referendum for local government, one immediately stands out.
“Last week a ‘Leave’ result that surprised markets saw the yield on 10 year Gilts hit another new all time low of 1.02% and which has now dropped below 1%.
“The real yield on 2068 government inflation linked bonds is currently MINUS 1.38% approximately. One of the signals this sends is that investors would rather surrender real capital value and income over very many years than risk exposure to normal commercial lending and investment opportunities.
“If private sector investment dries up local government institutions should consider becoming the ‘borrowers of last resort’, local government can in effect be paid by lenders to borrow money.
“The opportunities and operational leverage of local government institutions borrowing to undertake a multi-year program of regeneration of infrastructure and other projects are immense and worthy of consideration.
“A threatened recession could be avoided and essential long-term investments could made to re make and re tool communities nationwide.”
*This is an amended version of Robin Creswell’s comments.
Rob Ford
Rob Ford
TwentyFour Asset Management.
“It’s probably fair to say that financial markets had been under-pricing the risk of a Brexit for some time, and even more so in the last week, which has served to make the initial moves following the vote in the broader market indices more severe.
“The direct consequences of a Brexit on the UK economy at this stage are going to be hard to predict, but overall it is likely to harm growth and result in a policy response from the Bank of England, with a rate cut, probably to 0.25%, at the next MPC meeting on July 14th.
“With a further lowering of rates yield will become an even more scarce commodity over the medium term. However, in the near term, yieldier (and therefore riskier) assets may well continue to be volatile.
“It’s a well understood factor that financial markets don’t like uncertainty. There was a 
significant expectation that the referendum, which had itself been the cause of much uncertainty for some time, would bring an end to or, at least, significantly reduce it. Unfortunately it seems that is not going to be the case.
“We now have at least one leadership election ahead of us, political uncertainty over Scotland and much hand-wringing about how and what we will be able to negotiate as we extricate ourselves from the EU – both the financial and trade implications as well as the practical border-movement logistics.
“For local government treasuries this will likely mean lower returns and more risk – the UK’s sovereign rating is under threat, and bank ratings which have already been hammered could be hit again as concerns about future profitability and a possible recession may trigger further downgrades, taking more banks out of investment criteria for both treasuries and money market funds.
“Covered bonds are an alternative, but short maturities are scarce. AAA-rated Senior RMBS offer floating rate returns, are ring-fenced from bail-in risk, generally large in size and offer a significant yield pick-up to other assets, and should definitely be considered as a highly appropriate part of a balanced core cash portfolio in order to achieve security, liquidity and yield.”
Arlingclose.
Credit advice following the Brexit vote.
“Clients already focus their investment activity on low risk institutions, such as the highest quality banks and building societies. In addition, our credit advice has been positioned for some time with uncertainty in mind. For example, our current advised durations are shorter than those outlined in our template Treasury Management Strategy.
“We believe that the Government and the Bank of England have both the tools and the willingness to use them to prevent any immediate market-wide problems leading to bank insolvencies.
“And our cautious approach to credit advice means that the banks currently on our counterparty list have sufficient equity buffers to deal with any localised problems in the short term. Mark Carney’s statement this morning reaffirmed these points.
“There is therefore no immediate change to our credit advice on UK banks and building societies, nor for any other institutions.
“There is a risk that the vote to leave the EU, and the consequent uncertainty over our future trading prospects, will bring forward the timing of the next UK recession. In the coming weeks and months we will therefore review all UK based institutions, and it is likely that, over time, we will shorten our advised durations on those we consider to be most affected.”
Olwen Dutton
Olwen Dutton
Partner, Anthony Collins Solicitors
“Councils will probably be thinking about three areas. The first of these, as always, is the money, especially for those councils who are in receipt of large amounts of European Regional Development Fund (ERDF) funding.
“They will need to have certainty that either the funding will continue form the EU, or confirmation from the UK government that they will provide any shortfall.
“Projects which are in the process of development are of course much less certain to go ahead, whether or not they do so may have to wait until the outcome of the political changes triggered by the resignation of the Prime Minister, as until that is settled in some months’ time the policies which will govern the UK economy can only be guessed.
“The second area is the way forward as a result of those changes. The current chancellor has, for example, been the champion of the devolution agenda, and especially the Northern Powerhouse.
“Will this be paused, or has it gone too far to stop? Part of this will lie in the debates around how the country feels after the referendum, and if it really has caused not just a retreat from Europe, but also emphasized the desire to move away from a centralised UK approach where there is a vast gulf between the man and woman in the street and the politicians who govern their lives.
“If this is so, it could mean that there is resurgence in local democracy, and a real interest in local government as a result. Councils will be very well placed to take advantage of this and to renew civic pride in their place.
“The final area is more workaday but no less important. Many of the laws which originate from the EU are critical to core services provided by, and regulated by, local councils, waste and environmental issues for example.
“As the UK government starts to consider what will happen to this legislation it is important for proper consideration to be given to the views of local authorities about what should replace the legislation, as councils are best placed to advise upon what has worked, what is a failure and what frankly, is just not worth bothering with.”
