Monthly Letter June 2016

The month of June was totally dominated by the Brexit vote, the swing in the polls during the month and then the nal vote to leave the union. We sent out a quick recap right a er the vote with an update on our performance, but more importantly; where does this leave us now? We at Madrague believe that the biggest long term e ect will be on the European con nent and the Euro. The immediate nega ve e ects for the UK economy might well be just as most economists predict. Roughly 1-2% drag on the economy in 2017 compared to previous non-leave es mates. If there is a Brexit, which we believe, it can take many forms. We’ve seen quite a few surprising analyses of what might happen in the a ermath. One of the more surprising ones was a 20% probability of the UK just stalling and not invoking Ar cle 50. We nd that to be very unlikely. The most likely outcome, as we see it, is a “Norway-like” deal. Both the remaining countries in the EU, and the UK itself, have an interest of securing a deal that is economically bene cial for both par es.

The idea of the EU punishing the UK to set an example is more like schoolyard logic than poli cs worthy of two of the biggest economies on the planet. The UK is too important for the EU to try and bully. The price for se ng such an example is simply too high. So will losing one of its biggest net contributors be a massive set-back for the EU budget? We actually do not think so. Norway is currently paying just shy of EUR 1bln per annum to the EU. The UK is contribu ng a net of EUR c10bn (excluding payments to private UK organisa ons amoun ng to circa EUR 1.6bn). The UK popula on is roughly 12 mes that of Norway. Maybe the net contribu on when the dust has se led won’t be that di erent from the pre-Brexit vote. As we see it, the most important shi is the shi south in the EU. Germany is losing an important ally and the rela ve weight of Italy and Spain increases. We believe that the tremendous focus on the UK a er the vote may create a delusion of the real impact.

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