It has been a wild time of late, since that fateful day in June when the UK announced it had chosen to Brexit. Sterling has been in freefall, the FTSE 100 index is exposed, trillions have been wiped off the world markets and the way forward is quite uncertain. The Brexit reality is looking rather gloomy, but as the finance community and markets adjust to the new economic paradigm, it is important to take a breath and reflect.
What the UK has experienced may well go down in the history books as a revolution of the people against the governing elite. This anti-establishment vote has led not just the British nation but the whole of the global finance community into a wholly unprecedented economic regime.
In contrast, the positivity in the markets on the day of the vote suggest that the decision to Brexit was somewhat unanticipated by the finance community; the FTSE 100 was at a two-month high on the day of polling and the pound was strong against the dollar. But if the markets ever took a narrow view of public opinion, misjudging the mood of the nation, it happed this June. Next time, financial markets might take a wider examination of the political landscape when evaluating the investment climate.
So Brexit is happening, and as the adjustment to the new economic paradigm gets underway, it appears to be in the property sector where the hit is making itself most known. Brexit is knocking on the doors of significant players – Standard Life, Aviva, M&G Investments – closing their commercial real estate funds due to exceptional market circumstances. Abroad, Singapore’s United Overseas Bank – a major lender against UK property – moved quickly to close its books on lending to London. The UK’s financial services are also set to suffer, not just from the economic fall-out but also from the possible flight of human capital, as Britain’s highly skilled workforce consider more lucrative and productive careers elsewhere in Europe.
The financial services sector is a considerable export for the UK and supports upwards of a million jobs. How it can continue to punch its weight outside of the European Union is a key question for the period ahead, but a lighter-touch regulatory regime and the developments of new overseas relationships could help to offset the detrimental effects of Brexit. The devil will surely be in the detail of the chosen exit scenario, and employers will be watching developments closely.
Until then, the ship could be steadied with carefully considered market interventions from the Treasury and Bank of England. Making money more easily available to companies, either through a fall in interest rates or quantitative easing, will be welcomed by businesses and the FTSE 100 index should respond positively. Such efforts may undermine the currency market however, and the value of sterling could drop even further than its present low between now and the end of the year.
While this presents challenges to UK importers of foreign goods, it is a boon for foreign real estate investors, who stand to increase the values on their investment as the pound falls, while retaining the security and investment protection of the UK rule of law, which will at least be one thing to withstand the country’s exit from the European Union. A cut in corporation tax has also been signalled, and should help to preserve the impression that the UK is still a competitive place to do business.
What the markets really are crying out for though is stability. And while Chancellor George Osborne wastweeting about being in active consultation with the sector, the sudden resignations of other key political figures and the concomitant absence of strong leadership rattled the markets. For investors, the climate is one of nerves; any uncertainty is counter-productive when trying to stabilise a market.
Looking back at what happened in the wake of the vote, it was a major sell-off of currency that left the pound in freefall. While British media took solace in fact that the FTSE 100 eventually rose to a level slightly higher than before the vote,there was far less coverage of the damage across the world’s equity market, which was much deeper.This also ignored that the rise in the FTSE 100 was fuelled by the cheap pound.
The markets were being jolted by the outcome, but the shock was compounded by the fact that the fall came after a rather buoyant day for both the FTSE and the pound on the day that Britons went out to vote. In contrast to the cautious approach adopted by the markets two months prior, the big day itself saw the markets place their faith in the British choosing to remain in the EU.
It is possible that private opinion polling commissioned by industry gave cause for this surge of confidence, but the concluding public opinion polls were too close to call.In the event the markets got it wrong, andfound themselves rapidly adjusting to a new reality.
The predictions for what would happen to the UK economy in the event of Brexit were characterised and chastised as being all doom and gloom by the commentariat. And then the world watched, as the pound plummeted and the FTSE 100 fell. However, this economic plunge has not yet turned quite into the major crash that some had forecasted.
In contrast to historical major crashes, the shockwaves of Brexit were not caused by any economic trigger. Rather, the epicentre was a single, isolated, democratic event, which has left the financial markets less in freefall, more taking stock of the new economic paradigm.
The difference in this paradigm is the UK’s position as a financial centre now outside of the EU. It remains to be seen to what extent London will lose its financial clout as the city shifts under this new regime. The transition will be testing. But it is not just Britain’s financial sector that will be watching this closely; the eyes of the world are on the UK at the moment and it will likely be this way for a long time to come.
Adrian Bell is Chair in the History of Finance and Head of the ICMA Centre for Financial Markets at Henley Business School