Global Market Commentary

June 16, 2016

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Polls, Polls, Everywhere, and Not a Drop of Certainty

Markets are possessed by Brexit fears.  The market selloff that began last week may have been prompted by dramatic poll data showing the “leave” vote pulling  ahead of support by Brits to remain in the European Union.  That’s prompting existential fears because no one really understands what all the consequences might be.

Then, we had a horrific terrorist crime in Orlando.  The “leave” campaign briefly tried to capitalize on it, and then deleted the offending tweet amidst a torrent of condemnation.  But clearly, although it couldn’t be said, let alone used to make some political hay, it is in the top of everyone’s mind.  British working-class tabloid newspaper The Sun has come out in favor of Brexit, andit is more apparent than ever that the deepest subtext of the “leave” campaign is the issue of immigration.  As our analysis suggested, London and its commuter belt will vote overwhelmingly to remain; the backbone for the “leave” vote will be the immigration-skeptical and demographically weaker English working-class outside the capital (Scotland, which has oil and gas, will swing heavily to the “remain” vote).

So shootings in Orlando and Paris are shifting some minds… but likely these are minds in the demographic groups already prone to vote “leave.”  Barring another major event on the eve of the vote — and it would likely need to be one in Europe itself — we do not think this will sway the result.

Polls Are a Problem

Polls are clearly making markets nervous, but when we dig deeper, we get more skeptical that the headlines are meaningful.

Most notably, there is a huge divergence between online polls and polls conducted by telephone.  The “polls of polls” that capture headlines are usually skewed to favor online polling.  Online polls have showed “leave” and “remain” neck-and-neck for all of 2016.  But telephone polls, where respondents have more freedom to express themselves with nuanced responses, have showed a comfortable lead for “remain” for all of 2016, and still do.

There is also the matter of the polls’ reliability in totoBritish pollsters, as pollsters around the world have in recent years, experienced a humiliating failure in 2015, when they utterly failed to predict the upset victory by the Conservative Party.  Five days before the vote, they showed a 91 percent chance that there would be no majority in Parliament.  They still haven’t figured out what went wrong, and have been desperately tweaking their models ever since.

What about the bookies?  They have historically had a better track record, and as of this writing, they are suggesting a 60% chance that “remain” carries the day.  We should note that bookies themselves are not wholly immune to the polls, since a lot of money does watch the polls and is influenced by them.

The bottom line: demographic and social analysis; a study of polls, their characteristics, and their failures; and a close watch on bookies’ odds, all convince us that Britain will vote “remain” on June 23.

Still, this is the fear that markets have seized on as a justification for bearish anxiety.  We can’t fight that negative psychology.  Markets need to see Brexit fail.  Then, they will wake up and realize that their fear was irrational… and perhaps become open to interpreting incoming data in a way that will renew their bullishness.  

Investment implications:  Brexit fears are gripping global markets, providing an occasion for optimism to retreat and bearishness to reassert its grip on market psychology.  We believe that close analysis suggests a British vote to leave the European Union remains unlikely; we are particularly unimpressed by British pollsters, technically and historically.  Until the push for Brexit fails, the fear will remain.  When the vote happens and if the fears fail to materialize, there will be the prospect for positive data to be interpreted in a bullish light — and restore the market’s enthusiasm.