The great British discount sale?
- Post-Brexit rally shocks markets, but uncertainty remains
- Conservative Party leadership remains an open question
- Sterling may prove a solid buy after the current volatility plays out
By Neil Staines
“A day of worry is more exhausting than a week of work” — John Lubbock
A full week has passed since the groundbreaking and surprising Leave vote in the UK referendum on EU membership. Press commentary has been awash with prophecies of economic doom and ratings agencies have seen fit to take immediate negative rating action (as we noted on Tuesday).
However, with the FTSE 100 closing up 3.6% yesterday at 6,360.06, just 1% off the high of the year, having recouped all the post-Brexit selloff, it is perhaps worth taking a step back and considering some of the broader implications and opportunities beyond the knee-jerk reactions in financial markets.
The more UK-focused FTSE 250 remains around 8% lower reflecting the heightened uncertainties of the current backdrop once you strip away the benefits of currency depreciation on the value of GBP-based global companies.
This is an important point: The benefits of a free-floating currency as a macroeconomic counterbalance (one that is sadly not available to the 18 members of the Eurozone) are manifold.
The clear and immediate discount in UK companies or commodities (when priced in GBP) is an important factor that will likely drive significant inward investment. Not just M&A on UK businesses, but tourism (Chinese internet searches for UK holidays are said to have skyrocketed), property and UK exports are all likely to benefit.
This is not to mention the positive implications for the UK’s current account deficit.
From an overall economic perspective, however, the situation for the UK remains unclear. It is almost ironic that there should be so many uncertainties in so many areas as a result of a ballot paper with only two options.
It is likely, however, that over the coming months and years, and with monetary policy at the point of diminishing (or diminished) returns, the global economic recovery will become significantly more reliant on fiscal and, by default, political direction
“There cannot be a crisis next week. My schedule is already full” — Henry Kissinger
From the point of greatest uncertainty, the UK today begins the process for the rebuilding of Conservative leadership, government and ultimately the country, as nominations for the Tory leadership are announced.
At the current juncture, the EUreaucrats are outwardly taking a very hard (bordering on childish) line with the UK. However, it is likely that the focal point of uncertainty shifts, perhaps quite quickly, back to Brussels and the rest of the EU.
The UK will gradually transition towards a plan – something that has been sadly lacking in the Eurozone – to deal with a number of issues since the onset of the financial crisis. The months ahead will likely witness a re-emergence of the Greek crisis, major issues for Italian banks and, amid social disquiet, 2017 brings French and German elections.
Against this backdrop the UK could well transition from the heights of uncertainty, to dead cert.
In the near term, uncertainty and volatility remain high after the surge in activity and volumes in financial markets over the referendum period. That is likely to be exacerbated by month, quarter, and half year-end activity today, and the rebalancing flows that are as likely intuitive as counterintuitive.
From our perspective, GBP is reaching the pinnacle of uncertainty and we are diligently watching the political and economic backdrop, as well as valuation opportunities to buy GBP for the medium term.
We maintain our view that equities and risk assets are too keenly priced for the current macroeconomic backdrop, but over the coming months GBP may well be a very different proposition.
— Edited by Michael McKenna
Neil Staines is head of trading at The ECU Group