Comment from Colin McLean, managing director, SVM Asset Management:
The challenge for the UK is to move to being a good neighbour with the EU rather than a reluctant tenant. But how bad is Brexit for the British economy and stock market? Already it looks like the Pound has made a lot of the adjustment – a fall that may have been necessary anyway to help adjust the current account deficit, of which trade with the EU is a component. The Euro and EU will not emerge unscathed in financial markets; there will be a short term shock to growth on both sides.
But we live in a world of competitive devaluations and the UK has little inflation, giving it the potential to benefit from the lower Pound. Interest rate rises to ‘defend’ the Pound may not be wise. The effective devaluation will give a much needed boost to exports, and for the stockmarket will raise the value of businesses with overseas earnings – a large component of the FTSE 100. The experience of other countries with devaluations, or even of the UK in 2009 and after ERM exit, is not always to see stock market falls.
Whether the shock to the UK economy will hit shares longer term is not clear. In the short term, the worst affected areas of the UK market will be mid-cap, housebuilders, property, banks and leisure. But the UK may be able to move to European Economic Area status, which would preserve a lot of the trading benefits. The EU’s challenge will be capital markets union, banking union and moving towards political union.
Some bad economic news is likely to come quickly – companies do not like to let a good excuse go to waste, so Brexit will be blamed for all manner of ills and missed forecasts. The London operations of some major global banks may announce layoffs; with the IPO queue being dropped. But volatility is good for many investment banks and traders, and London has unique skills and liquidity in currency trading.