CFA Institute boss: ‘Brexit isn’t going to happen’

Smith believes that the economic reasons will convince the British to vote in favour of EU membership. [Jorge Valero]

Institutional investors, like insurers and pension funds, are increasingly turning to long-term investments, according to Paul Smith, the head of the CFA Institute. Smith told he is “very” optimistic about Europe, saying be believes Britain will not leave the EU.

Paul Smith is the President and CEO of the CFA Institute, which brings together more than 140,000 members worldwide in promoting the highest standards and professional excellence in the investment profession.

Smith spoke to Jorge Valero at the St Petersburg International Economic Forum.

Are investors concerned about the current instability, or are they looking at the long-term scenario?

The problem is that when someone speaks about investors, it is a very broad categorisation. You have retail investors who tend to be less well-informed, more short-term in their thinking, and therefore more prone to be affected by headline risks than institutional investors, because they are more capable of taking a long-term view.

One of the elements changing in the capital markets is that they are in general more dominated by institutional investors than by retail. Institutions are increasing the percentage of money that is directly invested, as opposed to money invested through stock markets.

This means that there is more of what I call ‘patient capital’ around compared to the past. This kind of capital is definitely looking through headline risks. The current political turmoil in the US, in Europe, in China or in Russia, is discounted and looked through, because people can see what the solutions are likely to be and they take into account these risks much more easily.

Davos wrap-up: Instability becomes the 'new normal'

The 2016 World Economic Forum, which concluded on Saturday (23 January), looked at a 21st century economy led by robots and artificial intelligence, against the backdrop of a more unstable and unequal world. 

What are their main concerns?

Issues like the fact that the world is essentially bankrupt and we have a huge amount of debt that we are struggling to service. The result is that we have very low interest rates, possible deflationary risks and governments everywhere increasing their taxation.

Those things are much more concerning for investors, because people cannot necessarily see what the end games are. Of course, much of the political turmoil in China or Europe is linked to slow economic growth. But the political side is the icing on the cake. The cake is what is happening to the global economy, and how we are going to reflate the global economy.

How is this going to happen?

There are some interesting dichotomies. You have supranational bodies like the World Bank or the IMF and the Asian Investment Bank saying that the biggest challenges the world faces today is growth.

But regulators are still marching to the post-2008 beat, which is how we control the financial services industry. So there is a dichotomy between the single biggest issue the world is facing today with the way regulators are acting at the moment on a country by country basis, which is “smack the banks”.

For politicians, it is also fashionable to criticise the financial service industry. We have plenty to be critisiced about but it is not helping. If the world is to get growing again, we need strong banks lending again. In time that would resolve many of the political crisis we witness today.

In regards to Brexit…

It is not going to happen…

If it happens, what would be the consequences from an investment point of view?

We conducted a survey among our members. Over the short, medium and long term our members think it would be extremely bad for all the three major economic indicators: the value of pound, the value of stock market and interests rates. The first two would fall while interest rates will increase. That is our view as a professional body. We make no comments on the politics.

But from a pure investment perspective, we do not believe a ‘Brexit’ is positive. You would do well in the short term, because you would consume your own products, but in the longer term, in order to grow, you need global trade because you can grow your own domestic economy to some extent.

Investors warn UK referendum 'already causing a short-term effect’

According to Global Infrastructure Investor Association head Andy Rose, members of his organisation, including Morgan Stanley and Goldman Sachs, see Europe as an attractive place to invest. But, he warned, the upcoming Brexit  referendum is causing negative “short-term effects”.

Does political instability weigh on investment decisions?

I think investors look at the broader picture, because in Europe, whether you are a left-wing government or a right-wing government does not really matter. Your ability to manoeuvre is very small.

For example, in Spain, if you elect an ultra-left wing government, what can they do? There is no money. And the same goes for a right-wing government. So the politics is important at a margin, but really it is not having an effect on most people’s investment decisions.

But this confirms citizens’ negative perception about how politics and investors are interlinked, how politicians are ruled by the markets…

It is naïve to assume that the two things were always divorced. As they say in the US, “it’s the economy, stupid”. Why do I think Britain will stay in? Because people who wants us to come out have not proved we would be economically better.

In fact, every economist, every business person says we would be worse off. At the end of the day, that is how people will vote. They will not vote for some political ideology, but rather they will consider if their pensions or jobs are secured. What is the proper province of politics? It is to provide security and the environment for people to make a decent living.

So why would we set up an artificial division? It is in people’s minds, it is a distinction without a difference.

Are you optimistic about the future of Europe?

Yes, very much. I think Europe is the wealthiest continent in the planet, by far. It has the smartest people. It is going through a difficult economic and political transition at the moment. But the will to make that work amongst most Europeans, put the British at one side, is overwhelming. But I hope my country decides to continue being part of it because it is the way forward.

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