THE BREXIT VOTE was the epitome of our instant gratification age. There we had, in the form of a compressed Facebook timeline of remembered less-than-halcyon-days, everything to cater for mass attention deficit disorder.
We had high-speed Julius Caesar as British politics reaffirmed its Shakespearean essence with a prime ministerial resignation followed by knife-throwing circus; a pound sterling collapse which brought back the ghost of Harold Wilson stalking the IMF battlements; a global equity rout and dead-cat bounce; and a compression of government bond yields on a flight-to-safety dynamic which seems likely to summon the spectre of negative yields in places you might not have expected, pronto.
It might have had the ambiance of a lucid nightmare, but it was of course a reality, of sorts. I say this, because I really wonder whether Brexit, as conceived by those who voted for it, will actually happen. A referendum result which impacts the real world of capital markets, but the recommendation of which can only be enforced by choice a long time after the turmoil it inflicted itself, strikes me as the stuff of Alice in Wonderland.
That is to assume that the pound continues to slide, bringing with it a nasty imported inflationary shock, business and consumer confidence collapses and Britain returns to its pre-Thatcher zeitgeist of doom and gloom.
What prime minister would push the red button of the Lisbon Treaty’s Article 50 amid such circumstances, only to super-charge the pain?
And then there’s the possibility of constitutional crisis and a mandatory House of Commons vote on the matter, as British parliamentary sovereignty and the democratic mechanism as conceived by Edmund Burke is affirmed. This is simply to say that it’s not done yet, this “Brexit”.
VIEWED FROM SINGAPORE, there is a sense of bafflement at what appears to be a self-inflicted wound enacted by the lunacy of the mob.
Apart from marvelling at the anachronistic charm of British parliamentary procedure as they watched the televised House of Commons post-Brexit debate, salivating at the chance of snagging a London property or enjoying a holiday in Blighty at the attractive new exchange rate, most of the Singaporeans with whom I have discussed the matter are bemused by the whole affair.
That’s ironic of course, given that the departure of Singapore from the Malaysian confederation – an enforced expulsion which prompted former Prime Minister Lee Kuan Yew to weep on live television in 1965 as he announced it – was undoubtedly the best thing that could have happened to the city state. It was the Brexit of its day and just look at how Singapore has thrived ever since.
Indeed, to compare scandal-ridden Malaysia with squeaky clean Singapore is almost to invite a masterclass in escaping the clutches of uneasy federalism.
Then again, that was then and this is now. Not even Singapore can escape the hidden hand of the bond markets and the rush to book high-quality Asian debt which offers yield signally lacking in the markets of the developed world.
ASIAN GOVERNMENT BONDS are in the crosshairs of the fixed-income buyside wherever you look, least not in Japan, where negative yields prevail across the curve and a rampant yen renders the carry trade – borrowing at ultra low yen rates and reinvesting in high yielding Asian government bonds – look like the most compelling deal in town.
Given that we are in sped-up cartoon land, a place where Boris Johnson can go from teddy bear arch pretender of the crown to bloodied Humpty Dumpty in the space of five Westminster minutes, we can easily conceive of rates going negative in Singapore and in the rest of South-East Asia rather quickly.
The Basel III liquidity coverage ratio, which stipulates banks hold high quality liquid bonds as a risk mitigation measure, is driving this dynamic, which in my opinion is highly likely to eventuate in negative yields across Asian bond markets.
I say this even though no quantitative easing measures are in place across the region ex-Japan. The truth is, global risk-averse capital has nowhere else to go. The one percent handle on Singapore government bonds might look parsimonious, but you can burn through that at a 10-year duration in a matter of double-digit trading days, as the post-Brexit price action has shown across the global government bond complex.
And in relation to that, the 4% and near 3% on offer in the Philippines and China government debt respectively look positively orgasmic.
Unravelling the exact mechanism by which an enforced Brexit impacts on global economies, or indeed those of South-East Asia such that the outcome is negative nominal yields, is profoundly challenging. Indeed, following the logic of the current prevailing terms of trade enjoyed by the United Kingdom suggests the pound is outrageously oversold.
Whatever, a looming Brexit is proving to be a chimeric provider of crowd hysteria. Nevertheless, as far as Asian government bonds are concerned, I reckon it helps power us to negative yields. Very quickly.
