Nigel Farage, head of the UK Independence Party has resigned, so has PM David Cameron, a Tory. The Labour leader Jeremy Cobyn grimly hangs on and so does Britain's Tory Chancellor of the Exchequer.
The latter, George Osborne, proposed a solution for the post-Brexit British economy—making it into a tax-haven. In a weekend interview published in Financial Times, the Tory who supported Britain remaining in the European Union revealed his goal of lowering the basic British corporate tax rate to below 15%. This to encourage companies to continue to invest in Britain as it prepares to leave the European Union.
The current UK corporate tax rate is 20% and it was slated to be lowered by 1% in each of the next two years. Now it will be cut faster, if Osborne has his way. That would make British corporate taxes the lowest offered by a large European country.
Speeding up the cuts, Osborne said, is necessary to make the EU exit work for Britain. It will require abandoning another part of the Tory program, balancing the budget to cut taxes. During the campaign, Osborne, supporting Bremain, warned that leaving the EU risked pushing Britain into a recession, something he now intends to forestall. However, it is unclear if the Chancellor himself will survive into the cabinet to replace that of David Cameron after Sept. when he is due to resign.
The reaction from foreign countries only just aware of Osborne's plans brass so far has been negative. If Britain engages in competitive tax-cutting, Brussels may make it harder for it to negotiate an exit without damage to its economy.
Pascal Lamy, a French bureaucrat who used to head the World Trade Organization, was one of the first to make a public comment, on the BBC:
“The UK is already activating one of the weapons in this negotiation, tax dumping, tax competition. I can understand why he [Mr Osborne] does that, because obviously investors are flowing out from the UK, and he wants to provide them with some sort of premium that would make them think twice before they leave the United Kingdom.
“He has to think about the impact of this on the Continent. This will be seen on the Continent as the start of the negotiation. And I'm quite convinced that at the end of the day, if you want a proper balanced win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation.”
Last Friday, German central bank chief Jens Weidmann said he would oppose fresh stimulus measures by the European Central Bank in the wake of the UK decision to leave the EU. European CB board member Benoît Coeuré said the ECB should delay further stimulus measures to see how Eurozone banks and businesses react to the British shock.. But taxes are another matter entirely.
Tax deals are part of economic planning by smaller EU countries. Ireland or Estonia offer companies (mostly American) very low tax bills with a 12.5% corporate tax rate; other member countries, including Luxembourg, Ireland, and the Netherlands, work out special deals for multinational companies to game the system by booking profits in their low-tax EU jurisdiction when they are generated in high-tax ones. But for a large country to get into tax competition would be a game-changer.
Post-Brexit, investors dumped global equities selling $3.3 bn worth the day after the poll, June 24, and another $5.6 bn the following Monday. Later last week some buying back occurred, but it totaled only about $1.6 bn. Investors switched their holdings to gold, which collected $1.38 bn of new money. And, amazingly, they put cash into emerging markets.
When the largest investors abroad return from their July 4th holiday, the tax-cut appeal of the other big English-speaking country may boost UK stocks and funds. In Asian markets, the prospect of new stimulus has boosted equities. Not just because of Britain, but also because a Bank of Japan survey of Japanese companies found that they expect inflation to fall over the next 5 years. If there is no further stimulus, via tax cuts, for example, Japanese companies will not have any reason to invest now for fear costs will rise in the next 5 years. Sterling is a horse of a different color. The pound is down -0.2% at $1.3254 and the euro is off 0.3% to $1.1105. Commodity currencies including the C$ are up.
Defensive Defense Share
*Goldman Sachs put a “conviction buy”, its highest rating, on BAE Systems (BAESY) with a target price of GBX 653, up from a pre-Brexit target of GBX 599. GBX is British pennies, how UK stocks are priced. BAESY was our selection before the UK exit vote and I did not buy more last week as the price rose too fast. But at least one reader did.
Energy
*The new head of Rio Tinto Down Under says he is interested in investing in lithium beyond an undeveloped deposit the firm owns in Serbia. Our Australian lithium play, Orocobre (OROCF), might fill the bill. It has a functioning extraction plant in Argentina. OROCF or ORL-Toronto.
*BP plc (BP) will go ahead with a $8 bn liquefied natural gas project in Indonesia despite lower oil prices.
*Delek Group (DGRLY) announced that June 30, it signed a non-binding memorandum of understanding with Fujian Yango Group Co., Ltd., a significant holding company incorporated in China which includes principles for concluding a binding agreement for the sale of its 52.3% stake in Phoenix Insurance for at least NIS 1.8 bn plus interest which will accrue starting Sept. 1 of which at least NIS1.85 bn will be in cash. The 5th attempt to sell Phoenix is subject to a contract being written and then approved by Israeli insurance supervisor Dorit Salinger who has vetoed a prior Chinese offer and 3 American ones, including one by Donald Trump's son-in-law. Separately, with its partners in the Tamar natural gas reservoir, Delek will invest $265 mn in drillingTamar 8 and constructing infrastructure. DGRLY's share is $119.25 mn.
Bankassurance
*Zurich Insurance Group (ZURVY) was upgraded by analysts at JPMorgan Chase from a "neutral" rating to an "overweight" rating. ZURVY was, perhaps, sold too soon by us.
*How lucky we were that Martin Ferara's fear of a breakup leading to a Johannesburg listing led us to exit Old Mutual stock. ODMTY was the biggest British fund management loser on Brexit Day, June 24, with a record 10.5% fall in assets under management according to The Financial Times. Its Old Mutual Global Investor funds (no relation) were hurt because of their focus on British mid-cap stocks. While $-earning FTSE 100 shares have regained most of their losses, the local economy-oriented smaller cap indexes remain deeply in the red.
*The £7 bn auction of its UK MBNA credit card operations by Bank of America may not take place because potential bidders are having problems raising funds after Britons voted to leave the EU and the offer prices came in below £4.8 bn. That lets potential bidder Santander (SAN) off the hook. It is a major lender to Britons via mortgages and credit cards already, something I omitted in my comments on Ana Patricia Botin. Apologies.
*The privatization of the remaining 38% or so Royal Bank of Scotland (RBS) will be delayed 2-3 years by Brexit, according to analysts. Too bad several of our RBS preferred shares were redeemed right before the vote. We still own the F's and the Nat West C shares which have a different prospectus with different rules on redemption.
Funds
*Adrian Ash writes: “Throw in emergency tax cuts such as George 'Os-terity' Osborne swore blind would be impossible if the UK voted for Brexit and the flood of money will only get bigger. This, according to your local pub bore, is what the word 'inflation' actually means: a boom in the supply of money. A surge in the cost of living is then the result. Or should be.”
“When exactly will QE money creation...never mind zero interest rates and now negative interest rates...edge consumer prices higher, not lower? Peering through this mist can hurt your eyes, almost as badly as trying to foresee when and where gold or silver might peak in the near term.
“Lots of your fellow BullionVault users think the top is here, or near, for the time being. Selling has almost matched buying again over the last week. Yet still the price rises...taking out $20 silver this morning with a brief spike to $21...and sending gold towards Brexit Friday's new 2-year high of $1358 in US Dollar terms.”
Adrian write for our advertiser, www.bullionvault.com which offers a taxable, legal, safe, and cheap way to own physical gold. It is sponsored by the World Gold Council which is funded by gold miners, along with SPDR Gold ETF, GLD, which we also recommend.
*No, this is not a good time to invest in US dollars as chaotic conditions threaten Britain and Europe with slower growth and when Japan is again facing deflation. Stimulus is coming and will lure money out of the US and out of dollars. Do not rpt not buy Power Shares US$ bullish, UUP.
*One of my favorite emerging markets for investing in is Mexico. Mexican stocks YTD are up about 6% in pesos but because its very liquid currency is used as a proxy for Latin American moneys, it is harder to trade, when translated into US$s the stock markets are flat to lower.We own 2 Mexican funds, Mexican Equity & Income, MXE, and REIT Fibra Uno, FBASF.
Eduardo Garcia wrote in www.sentidocomun.co.mx:
“The decision of the Bank of Mexico to raise its short term rates Friday by half a percentage point achieved not only the primary objective –to raise the cost of short-term borrowing-- but also its to cut longer term rates, however counter-intuitive this may seem. The benchmark short-term interest rate is now 4.25% vs 3.75% while the rate of bonds for over 3 years fell by as much as 0.2% in the last 2 days, both movements welcome to monetary authorities who want to see longer rates move as an indicator that inflation is under control. The target level for inflation is 3%.”
Indicating that the policy is working is that after weeks of drops, the Mex peso finally rose last week.
*New Ireland Fund published its holdings July 1 showing that its largest position is in CRH plc at 26.6% followed by Ryanair (combining Irish and ADR stakes at 16.41% and Paddy Power plc (whose odds on Brexit lost it money) at 7.31%. Kerry Group, the dairy, was cut to 4.42% but remains no. 4. A new food company has been added, Greencore plc, at 1.87%
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