The rough road just got a lot bumpier

28 June 2016 - 09:50 By David Shapiro

Like most money managers around the world I didn't sleep restfully on Thursday night. The betting shops and polls had tilted towards Britain voting to remain in the EU, and investor relief had pushed stock markets higher and inspired a strong recovery in sterling.The last thing global markets needed was more uncertainty. They had still not recovered from the ill-effects of the financial crisis sparked by the collapse of the US sub-prime housing market almost a decade ago.Yes, stock markets were a lot higher than they were at the depths of the financial disaster in 2009, not because confidence had been restored, but rather because of desperate measures pioneered by central bankers aimed at avoiding sinking the world economy into a swamp.In an endeavour to encourage businesses and consumers to borrow money and spend generously, governors from the world's leading economies reduced short-term interest rates to almost zero, following these moves with asset purchase programmes introduced to keep longer rates down as well.Economies have been slow to respond to these actions. A lack of belief in the future has quelled consumer demand, while businesses, rather than expanding their operations by buying new plant and machinery funded by borrowings at nothing rates, have used their cash piles to devour competitors and buy back shares.After their assertive bid the failure of central bankers to steer the world economy out of its low- pointing trajectory has raised even more misgivings in markets about what lies ahead, and the Brits' startling decision to leave the EU is only going to add more doubt to an already fragile state of affairs.According to the IMF, the UK is the fifth-largest economy in the world, but second to Germany in the EU, contributing 3.9% and 4.6% to nominal world GDP respectively. At nearly 23% of GDP though, the EU is the second largest economic region next to the US (25%).The fear overhanging markets now is that Britain's choice to leave the EU will usher in months, if not years, of bitter wrangling between the two parties as they map out the transition.Understandably, the EU will be severe in their negotiations, not wanting to make it appear easy for other disenchanted nations to pursue a similar line.In the UK, local and international players will review investment projects, expansion plans and employment until a clearer picture of the future shape of the economy emerges.Unavoidably, an extended period of uncertainty will batter business confidence, possibly plunging the UK into a recession. Not that the EU will withstand the loss of its second-biggest funder any better.Worse still is that the success of the disillusioned and alienated in Britain might strengthen the appeal of other parallel movements in the US, France, Italy and Spain.For investment professionals like me, the Brits' decision is a major disruption to the stability of markets. But there is little we can do other than to accustom ourselves to another extended period of low interest rates and thin returns in equity markets as global policy makers in the UK, Europe and the rest of the world attempt to traverse the road ahead.After 10 years of negotiating bumps in our path, I really thought we were past the worst...

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