BREXIT special. Does politics affect asset prices?

BREXIT special. Does politics affect asset prices?

15 Mar 2016


One of the most commonly and confidently asserted falsehoods is that markets hate uncertainty. Without uncertainty there would be nothing for markets to price. The pricing of assets is about probability. All questions of probability involve uncertainty. If you ever meet someone who believes in certainty sell them something because they will overpay.

Politicians, particularly conservative or establishment ones, often try to scare voters with the unknown. In the current “Brexit” debate, the stayer camp is accused of conducting a Project Fear campaign. One of the central points of this argument is that foreign investors will be put off by the uncertainty that would result from Britain voting to leave the EU.

This ignores the fact that almost everything in Britain already seems to be owned by foreigners. Politicians and other public commentators like to pretend that trophy assets are quintessentially British long after they have been sold off.  Witness the farcical outbreak of faux patriotism when a takeover of AstraZeneca by a U.S rival was suggested.

The reason why there has been so much foreign investment in Britain is, ironically, politics. More specifically, it has been the lack of interference by politicians in ownership rights. British politicians do not, by and large, confiscate privately owned assets. The downside of this is that rather a large number of exotic individuals with wealth accumulated in dubious circumstances are attracted for this very reason. And there are more on the way, according to today’s news.

“Ultra high-net-worth investors from Iran are poised to go on a buying spree of properties around the world – and London is likely to be the top location.”  City A.M. 15 March 2016

This is in many ways very annoying and even shameful unless you happen to be the legal vendor of an asset that has just been sold for a price beyond your greediest dreams. We can’t have it both ways, though it would be gratifying if there were some kind of effective test to verify that the funds used for the purchase had been lawfully acquired. This is supposed to be the function of money laundering laws but these appear to be applied selectively, despite the viral outbreak of compliance departments across all sorts of financial service companies.

Against this long historical background, the idea that foreigners would prefer British assets to be administered under a European Union umbrella is laughable. No, it is beyond laughable.


Unelected or dubiously elected politicians are a real danger to asset prices. By definition, they feel less constrained by the law or they change laws to suit themselves. In extreme cases asset values are destroyed. On my desk there is a 50 million mark note from Germany in 1923 and a 100 trillion Zimbabwe dollar note from 2008. I keep these as a reminder that there is no such thing as zero risk and, as previously stated, no such thing as certainty.

At the risk of stating the obvious, democratic countries will deservedly attract more investment than those with autocratic governments. One reason is that, as George Cooper writes, there is a good reason to think that “democracy, with its circulatory governance structure, is a cause of economic progress”: another reason is that democratic governments are less likely to steal your assets.

If you look at the website of Freedom House (an independent watchdog) you will see that it estimates that just 40% of the world’s population lives under a free political system. I am tempted to say that if you invest in a country like China or Russia, both of which are judged “not free”, you have no one to blame but yourself when it turns out that the protection of your rights is of little or no importance to their rulers.  


Within democratic countries, politicians behave as if their decisions are very important. They accuse each other of putting our economy, our services, our security and our human rights at risk.

The debates around the US Presidential candidates are a typical example of politicians seeing great negative economic consequences in the proposals of their rivals. The left wing Bernie Sanders is a soft target. It has been said that his policies would cost $18 trillion. That sounds like an awful lot of money though I doubt if many people even know what a trillion is. In the US it is a million millions. The population of the US is around 300 million. That implies that his policies would cost every man, woman and child in the US $60,000 each. It could even be worth it if his stuff is good.

Political debate is normally much more micro than that, albeit touching a level of sophistication that can be found in the works of Enid Blyton. One can easily imagine Noddy and Big Ears arguing about how much money it would be prudent to borrow and whether taking out a loan to repaint the fence around Noddy’s little garden would count as expenditure (because the fence will be prettier and will make people happy) or investment (because it will protect the fence against the weather and make it last longer). Come to think of it, I think I have already introduced concepts here that are beyond most political discourse.  

You might think it obvious that politicians of the right tend to restrain public expenditure and to try to cut taxes and that those of the left, in Margaret Thatcher’s phrase, spend until they run out of other peoples’ money. There may be some marginal truth in this but not enough, in my view, to influence investment decisions much. Once they have been elected you can’t rely on politicians to behave. In 2003, the Republicans (with George W Bush seeking re-election) passed a Medicare bill that even Bernie Sanders might hesitate to propose. The story can be found here.

Politicians of all persuasions are tempted to believe that prosperity and social justice can be achieved by small interventions that change the way that people behave. This is sometimes known as Nudge Theory. Nudge Theory is an attractive idea because it involves behavioural psychology and seeks to avoid heavy handed instruction.


I don’t know if Nudge Theory is much good. I’d like to think it is but what is sure is that the spectre of “unintended consequences” is always lurking close by. There is a theory that if white lines are removed from the middle of roads drivers will slow down and we will all be safer. Should we try that? Or would it tempt faster drivers into reckless takeover manoeuvres?

The creation of the Euro was a political act. The Germans were reluctant to give up the Deutsche Mark but allegedly traded it for French acceptance of German reunification after the Berlin Wall came down in 1989. (I don’t know why German reunification needed the green light from the French but apparently it did).

France and Italy were foremost among the countries that wanted to share the stability of the Deutsche Mark if the Euro could be launched as the currency of Germany surrounded by its committed friends. I seem to be one of the few people in Britain who thinks that this was actually a pretty good idea. Why not impose German financial standards on all the member states who signed up to the Euro?

It turned out that nobody, least of all the banks, bothered to impose German financial standards on Greece, Portugal, Ireland, Italy etc. They just behaved as if those high standards had been miraculously conferred and lent reckless sums to reckless borrowers at German rates of interest. The unintended consequence was that a large part of the European banking industry teetered on the edge of bankruptcy, a position in which, arguably, it remains eight years later.  

If I were a Vote Leave campaigner I would suggest that the Euro was created by a body that was only accountable to its electorate at arm’s length. On an interesting related historical note, when Britain last had a referendum about the European Union in 1975, politicians on the left of the Labour party were among the few to campaign for “out”. Essentially they thought that Europe was undemocratic and undermined the sovereignty of the UK parliament (an argument that has now been embraced by the right). Socialists now all seem to want to stay in the EU. Why is that I wonder? If I were a Vote Leave campaigner I might suggest that it is because the EU has become a bloated network of subsidised interdependency. Socialists seem to quite like that sort of thing.  

Democratically elected politicians who respect the law and remember that they can be turned out of office seem to offer the best chance for asset prices. Politicians who meddle and attempt social outcomes by tinkering with financial incentives are dangerous, even when they act from the noblest intentions. Take a look at the hideous mess of Britain’s energy policy. We are near to the point at which investment in new and apparently essential capacity has been completely killed because incentives to use wind, sun, biomass, nuclear, gas etc have been  flip-flopped backwards and forwards.

Tomorrow George Osborne will make a budget speech in which he will yet again indulge the fantasy that he is a puppeteer and the rest of us are the Von Trapp children yodelling away like happy goatherds. Here is some pocket money to help us buy a one-bedroom flat in Deptford before we are fifty! There is a special chance to invest the last of our savings in a perpetually loss-making bank that we already own! Yippee.     

Mr Osborne probably gets a little thrill from seeing a few share prices move after he has spoken. But you can be pretty sure that whatever he selects for his attention will move downwards rather than upwards. Because politicians are the enemies of asset prices if they affect them at all.

That having been said, we owners of assets should be wary of attributing too much influence to the actions of politicians. Money runs away from meddling fools and seeks sanctuary elsewhere. Investment dries up and all but the most bigoted totalitarian recognises that eventually.


Now let’s go full circle back to the EU and the Brexit debate. I think it is advisable to assume that everything offered as an economic fact by every politician is wrong or deliberately and misleadingly selective. It will save a lot of time. On Farming Today on the radio on Monday, Prime Minister David Cameron stated that if the UK leaves the EU, £330 million of beef and lamb exports could be at risk. I suppose that what he meant was that all the EU countries might ban imports of UK beef and lamb out of spite. That is Project Fear in action. How about Project Fact?

In 2015 the UK exported 92,300 tonnes of beef to the EU. What would happen to that meat if it couldn’t go to Europe? Well, here’s an idea. It could go some way to replacing the 244,400 tonnes of beef that we imported from the EU in 2015. The Republic of Ireland on its own exported 183,500 tonnes to the UK.

The UK is a big net exporter of lamb to the EU, particularly to France, which devotes 25% of its own breeding ewes to cheese production. (If you have ever tasted Ossau Iraty you will know why).The UK, which has 15.5 million breeding ewes, is well suited to raising lambs and the French buy 54% of our total exports. Perhaps the French will start a trade war and do without Gigot d’Agneau for a while. Perhaps they are really stupid. Perhaps we should stay in the EU because the French are really stupid. To be frank, it’s as good an argument as I have heard so far.     

Leave a Reply