Business & Investment

Brexit may not hurt UK investors

On June 24 2016, Brexit became a reality following the outcome of the UK referendum. The immediate reaction of many European investors to the news that the UK would leave the EU was disbelief and horror. Economic forecasts were rapidly revised downwards, equity markets dropped, bond prices fell through the floor, the euro and sterling fell against global exchange rates, and gold soared as investors fled to safe-haven assets.

For investors, the uncertainty will continue. Nobody knows when Britain will leave the EU and what the terms will be. To leave the EU, Britain has to invoke Article 50 of the Lisbon treaty, which gives both sides two years to agree the terms of the split. UK Prime Minister Theresa May has indicated that she will not invoke the treaty before early 2017.

Uncertainty is usually bad for stock markets and this is one of the most uncertain times in modern European history, so investors could be forgiven for feeling a little nervous. Nevertheless, most equity markets have rallied again sharply and sterling is now only 10% cheaper against the euro than it was.

Some concerns remain, notably the weakness of several European banks and the banking system, the implications of lower investment in business, slower economic growth and political uncertainty across the continent. Elections are due next year in Germany, France and Holland against a background of rising nationalism in politics and fears over immigration.

Moreover, as Angela Bouzanis, Senior Economist at FocusEconomics says, “External events have the potential to exacerbate home-grown problems. Italy remains a key concern due to the fragility of the banking sector and [as] the forthcoming referendum threatens to unseat the government of one of the Eurozone’s largest economies.  A general waning in support for the status quo could reverberate through elections [throughout Europe] and the impact it would have on government policies is uncertain.”

However, some of the adverse effects of Brexit on European economies have already been alleviated by the depreciation of the euro against major currencies other than the pound, helping exports to remain competitive.

It may be Britain that hurts most, although the extent will depend on the terms of the exit. The UK will grow more slowly than it would have done without Brexit. GDP will be about 2% less over the next two years, according to BNP Paribas. But with the lower pound, British exports will be much more attractive and by 2018 the rate of growth of GDP will increase.

This is not such a bad landscape for equity investors. Moreover, a number of leading European companies are well placed to respond to the consumer demand that will drive economic growth in the short term. Consumers will still need drugs, petrol, cigarettes and beer and leading European companies are very good at making these.

If a careful monetary policy can be implemented, and the political scene remains relatively liberal, reports of the death of the Eurozone should hopefully prove to be greatly exaggerated.

September 2016

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