Free trade at any price? #Investments
The trade agreement being negotiated between the EU and Canada, CETA, was effectively blocked by a Belgian regional government but yesterday a compromise was reached. The agreement runs to 1,600 pages and is a complex, comprehensive economic and trade agreement that demonstrates how difficult it will be for the UK to negotiate a trade agreement with the EU in the event of Brexit. Free trade with Europe will be by lengthy negotiation, if at all. Do we need free trade with Europe? Some controls on imports such as requiring goods to be of a standard that supports sustainability might be a good idea. Many goods imported into France need to have a 2-year warranty rather than the usual one year. Isn’t that a good thing?
We have to consider the impact of the triggering of Article 50 next March in the markets before we can even think about the impact of the actual break from the EU. It looks like it will take years to negotiate trade agreements not only with the EU but with countries around the world, including the mighty US. I’m expecting a lot of nit picking and delays, but hopefully, China will be more accommodating and pragmatic. It could be our financial institutions that will suffer most if we don’t get a speedy agreement.
In the market
The stock market was quite volatile this week. I didn’t have a good week losing over 1% of my equity, at least on paper. Solo Oil dropped about 10% and recovered a little and it was the same story with Premier Foods whose share price hit a high of 55 only to hit a low of 43.75 this week. The bid price is currently 45.50. I think that has huge upside and it is simply panic that has slashed the price. I am still watching the value of the pound which is still down due to panic and fear related to Brexit. The economic doom and gloom is sending the price of gold up and so there is a silver lining to the Brexit cloud. We need to ask what companies will suffer if we can’t get a trade agreement with the EU. We have already seen problems for Unilever, they are having problems because of the drop in the value of the pound. Import restrictions could make things even worse but by that time the pound will have probably recovered. The companies to worry about are the financial companies that do a lot of business in Europe. City of London hedge funds and maybe banks could suffer but I expect inflation and interest rates to rise; that will benefit banks. There is really no need to panic and we as investors can try to predict day by day what the market will do and benefit from the volatility. Free trade with Europe and other countries is desirable but not essential.
The pound and oil
I’m watching the value of the pound and the price of Brent crude quite carefully. I have Premier Oil on my watch list and the time to buy will be when the oil price looks like taking off. An OPEC agreement might move the oil price up, but there are still large stocks available. The value of the pound is fairly stable at around 1.224. If there are signs it is starting to rise then I might sell GlaxoSmithKline which is benefiting from the current exchange rate.
There is much political uncertainty. Teresa May seems to inspire confidence with her oratory. I see two mistakes, however, first she refers to the last few years of Conservative government and believes it was a success. I also think her refusal to be pragmatic and her criticism of Bank of England policy suggests an unswerving belief in Thatcherist style monetarism. While quantitative easing isn’t desirable as it devalues our money, it does create demand and as we have an almost unlimited supply of goods and services it doesn’t create inflation which is surprisingly low. She needs to get her mind-set out of the 20th century and into the 21st.