Overview
Brexit is not just a British problem
Brexit is not just a British problem. Of course, it has dominated UK politics for the last three years - and may do so for years to come, even if a departure from the EU is sealed with a deal this week. But the political uncertainty it has spawned is mirrored in many markets across the world. In this episode of Cool Heads, we hear how market fragmentation is on the increase.
Market fragmentation
Public demands for politicians to curb the growth of globalisation have led to protectionist measures such as tariffs and capital controls. Indeed, trade conflicts have escalated between the US and China, the US and Canada, Mexico and Europe, and Japan and Korea. And there have been new political spats over where companies are listed. These tensions reflect weakening political support not only for a global trading system, but also for a global financial system in which capital flows almost seamlessly around the world.
As globalisation slows - and perhaps even reverses - a multi-polar world is emerging. The big powers are seeking to dominate their own regions and unravel their interdependent economic relationships. Many countries are taking a more nationalistic view of the world, making bilateral, as opposed to global, arrangements. As part of this process, further barriers to global trade may be erected, which will increase the cost of capital. This could have a knock-on impact on companies around the world and create liquidity strains as capital becomes trapped - a fragmentation of markets.
Position for range of outcomes
Specifically in relation to Brexit, another shock to the pound like the one that followed the 2016 referendum is unlikely. But sterling volatility is expected to increase as we approach the 31st October deadline, even if a deal looks more likely. Investors can manage this type of risk by having a diversified portfolio that is able to withstand a range of scenarios, rather than trying to pivot towards a particular outcome.
