The Effects of Brexit
Britain’s shock vote to pull out of the European Union wiped $2.1 trillion from global equity markets.
- Stocks in the UK have since risen as Britain’s central bank hinted at fresh monetary stimulus to limit the impact of the country’s vote to quit the EU. A slump in sterling has also supported the FTSE’s export-driven, international companies, since a weaker pound can make their goods more affordable to overseas buyers
- The pound crashed 10 percent to a 31-year low at one point. The Sterling however rose along with UK government bond yields on the anointing of new Prime Minister Theresa May
- Investors fled to the safety of gold, the yen and blue-chip bonds. Gold jumped nearly five percent hitting a 2-year peak and the yen surged 4.2 percent against the dollar and 7.0 percent on the euro.
All airline and tour operator stocks have taken a hit such as Easyjet, Ryanair and Thomson travel.
With general economic uncertainty comes with it the reduced demand for air travel.
Global terrorist attacks have made consumers more fearful of flying and due to the drop in Sterling, it has become more expensive for British tourists travelling abroad.
Decreasing domestic demand could lead to the need for bigger discounts that would undermine profit margins.
HSBC, JP Morgan and Morgan Stanley are saying that they are due to cut UK jobs and move these abroad to financial hotspots such as Paris, Dublin and Frankfurt in order for these foreign banks to access the EU. London will no longer be the base for European operations as an access point to the single market.
US banks are already preparing for the contingency that the right to sell financial products and services from Britain to EU clients could be partially or entirely abolished.
Banking stocks such as Lloyds Banking Group are now plummeting due to the anticipation that the Bank of England will drop rates from an already record low of 0.5%.
Foxtons have dropped in price as well as British land has dropped 17% of its share price post-brexit.
Foxtons has suffered from a nationwide slowdown in housing transactions and a more pronounced slump in central London property, which has been hit by higher rates of stamp duty on expensive homes and a waning of interest from overseas investors. Analysts warned that the housing market would slow following the decision to quit the EU, initially because of uncertainty about the impact of the decision on house prices and household finances.
The UK housing association said its credit outlook had been downgraded from stable to negative by Moody’s following an assessment of the potential impact of the vote to leave the EU.
Standard life, Aviva and M&G have all had to stop massive withdrawals from their property funds as a result of the panic caused by the uncertainty of Brexit as it would force these fund providers to sell off major assets such as buildings to maintain redemptions. This is still after Mark Carney, Bank of England governor, pledged to keep banks lending.
For housing associations, estate agents, trusts and funds – their bonds have been downgraded by all rating agencies around the same time Standard & Poor’s, Moody’s and Fitch downgraded the credit rating for the United Kingdom from a Stable to Negative outlook.
On a side note, demand for houses being built is outstripping supply based on the labour resources the UK has. We have a skills shortage in this country and 12% of the construction labour force is made up of immigrant workers. Leaving the EU will have a major impact on housebuilders.
Energy companies have been doing well as a result of stronger global demand for competitively priced exports due to the Sterling weakness. Sectors that earn revenues in dollars have benefited from sterling weakness since the vote, with a rally in oil prices helping the heavily weighted commodity sector.
Foreign firms exporting to the UK e.g. Australian vintage – the wine producer will be negatively impacted by the weaker pound as the UK imports less
Domestic firms such as Sports Direct that buy from China in dollar denominated currency that it currently hasn’t hedged for will suffer due to a weaker pound
Domestic firms with e.g. 90% of their revenue derived from overseas such as Rentokil the mosquito repellent company and domestic firms producing UK exports such as cider, motor cars like Ford and Jaguar. It depends – a weaker pound can affect affect revenues in terms of conversion but increased affordability of UK products can incite increasing demand and volumes
Signs of hope..
However, despite the uncertainty of Brexit, there has been some significant investment and merger activity ;
AMC, the US cinema chain controlled by China’s wealthiest man, has taken advantage of the sharp drop in sterling after the EU referendum and bought the UK’s Odeon cinema chain for £921m.
Japan’s SoftBank has agreed to buy UK’s Arm Holdings (British smartphone chip designer) for £24.3bn. Cambridge-based Arm, which was founded 25 years ago and employs 4,000 people, will be the largest acquisition of a European technology business
GlaxoSmithKline, the largest UK drug company, is to invest £275m to expand production capacity at three British sites to meet growing global sales of new medicines.
Deutsche Börse wins shareholder approval for LSE merger. The tie-up would create a pan-European exchanges champion able to compete better with US and Asian rivals that dominate the industry.