Investing In A Post BREXIT World

In the last monthly report we said,

"If the UK votes to leave the EU we see significant risks of a full-blown banking crisis and simultaneously a political and constitutional crisis.”

"There are truly serious implications for the UK’s banking industry and our expectation is that banking debt and banking shares will be hit hard.”

Two days since the UK voted for BREXIT the risks that were outlined in the report have already been realised. The prospect of a UK general election by the end of the year is highly likely while yesterday shares in RBS and Barclays were halted because of steep declines. Since Friday Barclays is down 18%, RBS 24% with losses continuing. Later in the report the case was made for Building Societies in a post BREXIT world

“Building Societies have very little FX exposure with almost all their business based in the UK. This

UK centric focus is an immediate advantage over banks and means that they can face any volatility in the housing market from a infinitely stronger starting position.”

Since the result of the vote, price losses in the Building Society debt sector have been capped at around just 1%. Further to the above the simple point was made that in times such as these the safest asset there is, is one that "which brings the tangible benefits of shelter and warmth.” and "On that basis investors looking for safety would be wise to gain exposure to UK’s housing market one way or the other.” That is what this Fund provides through its investments into the debt securities of the UK’s building society sector and will continue to provide as things become more uncertain.

In terms of market outlook, the leading consensus is that the UK is heading for a recession and it is one that is hard to disagree with. In the short term the main source of pain is going to be sterling’s record fall to a 30 year low. Currently the UK has one of the largest current account deficit’s in its history which means day to day living is going to get a whole lot more expensive. Inflation will rise and expenditure will by necessity be cut back, which in turns leads to higher unemployment and lower incomes. In the longer term there may indeed be a benefit for domestic exporters but this requires serious structural change.

In terms of the investment markets, equities will bear the brunt of the pain while there will be a clamouring into UK government debt. Many investors are going to be cut off from the European investment markets meaning that there will be a shortage of assets in which to invest. With inflation rising and interest rates near zero many investors will be forced to take losses on their positions. In such an environment investors will scour the high yield sector looking for investments that combine return with low risk. The building society sector is that sector. With banks in turmoil there is simply nowhere for investors in the debt markets to turn to generate return without substantial risk.

Finally it worth repeating that this Fund started its existence following the turmoil of the 2009 banking crisis. In the last report the point was made that;

"Since 2009 the market has been waiting for another banking crisis, firm in the belief that banks were never fixed despite the efforts of governments. They only thing keeping them operating being the implicit state guarantees.”

With the government in turmoil, the fear now is that with an impending banking crisis there is not the will, or indeed the wherewithal, to take the same measures as was taken in 2009 and that we are heading for something very serious. We believe that our track record can provide investors with confidence that their investment into the Fund is a wise one and one that will weather the storm.