You all know that I am worried about the transitional impact of the Brexit vote, that being my main reason for voting Remain. News media reacted to the initial currency and stock market reactions with phrases like "falling off a cliff" and "meltdown". And the New Yorker had a wonderful cartoon of John Cleese doing his silly walk over the cliffs of Dover. So, how's it going?
The short answer is that, as usual, there was a large degree of exaggeration.
Having had a personal pension invested for several years I have long since got used to the idea that paying too much attention to day to day movements in the markets, unless that's your job, is a good way to go rapidly mad. After all, unless you are a hedge fund or speculator, it's all about the long term. So I decided to wait all of a week before checking!
The pound certainly took a hit, particularly against the dollar. At the close of the market on June 23 (Referendum Day - how could you forget so quickly?) the sterling rate was 1.50$. It fell off the cliff overnight to 1.33 and, after a slight recovery followed by a dip to 1.315, settled down at around 1.33, which is where it was on 30 June (and still is, see the currency charts at xe.com where you can choose to look over a day, week, month, year and up to 10 years). Sterling had rallied in the run up to the referendum on anticipation of a Remain vote, so 1.5 was artificially high. It had been as low as 1.39 in February, but was typically in the 1.39-1.46 range. I'll call that 1.425, so a rate of 1.33 represents a fall of nearly 7%. A pretty small cliff, then, for those of us who have seen the rate close to 1 and over 2 from time to time, without going back to Harold Wilson's devaluation, which was from 2.8 to 2.4 back in the autumn which followed the 1967 summer of love, when some of us wore flowers in our hair.
On 23 June the FTSE 100 share index closed at 6338. At the close a week later it was up 2.6% at 6504. The last time the index was over 6500 was in August last year. So it fell up a cliff then. The "British" companies that make up the 100 share index include many large multi-nationals. The reason I believe the index is up is because these big companies earn a lot of revenues in other currencies, particularly dollars, so the pound's fall will increase their sterling revenues, holding out the expectation of higher profits and dividends.
It's often said that the FTSE 250 index is a better bellwether* for the British economy. That was 17333 on 30 June and 16271 a week later, some 6% down. The all share index, which you rarely hear quoted, was 3481 on 30 June and 3515 a week later, 1% up. So not much of a meltdown there.
*I always thought this had an "a" in it. You learn something every day...
I thought the euro would suffer more than the £ if we voted to leave. But the £ is down about 6% against the euro, which itself is down against the dollar, but only 2%. But the German, Spanish and Italian stock exchanges all fell in the 2 working days after the vote, by 10, 14 and 16% respectively. Although they have bounced back a bit, this is at least as big a cliff as we have fallen off.
But not very big cliffs so far. Mind, conventional wisdom has it that the markets react to the conditions they expect over the next 12 -18 months. This makes sense as that's the period over which the next tranche of dividends will be earned. In that time we will still be in the EU and the single market, so you wouldn't expect the markets to do much more than react to the sterling devaluation. So early days, then.
It's not just about markets of course. George Osborne has abandoned his target to achieve a budget surplus by 2020, as he wouldn't have been able to get that past the OBR anyway, at least not without spending cuts and/or tax rises. There is no doubt that the outlook for our public finances has just deteriorated, if only due to the uncertainty. And our credit rating was downgraded, because we are running a huge current account deficit (imports minus exports) as well as a still substantial budget deficit. Those who think "austerity" has been overdone may struggle with this because they clearly think we could spend more, but the downgrade shows where that path would take us. (The reason for the inverted commas is, of course, that we have increased spending at a lower rate than previously planned rather than cut it, which is a strange kind of austerity, at the risk of opening up a different debate).
I think so far I am most concerned about the likely reaction of big companies with headquarters or major offices in London, in particular in the finance sector. Now you can moan about "bankers" as much as you like, but we are world leaders in the financial sector and it accounts for 12% of economic output, 2.2 million jobs nationwide and a huge £66 billion of taxes annually. I am sure most of these companies are preparing contingency plans to move at least some staff to locations in the EU. (The stats above come from a Sunday Times article about bankers overheard on the morning after the referendum saying that they will be applying for Irish passports). Since the top 3,000 earners pay more than 4% of total income tax receipts (or at least they did in 2014 - see http://www.telegraph.co.uk/finance/personalfinance/tax/11233686/How-top-3000-earners-pay-more-tax-than-bottom-9-million.html) and the top 1% (about 300,000 high rollers) pay around a third of all income tax we would miss their contribution to the exchequer quite badly.
So the sun is still shining, but there are gathering clouds. I am reminded of the joke about the chap who jumped off the Empire State Building. Half way down he's asked how it's going and he says "so far, so good!"
I may return to how the markets are doing periodically. It could overtake my interest in Dustin Johnson's putting stats.
The lyric, which you all recognised of course, is from The Clash's "London Calling":
"The ice age is coming, the sun's zooming in
Meltdown expected, the wheat is growin' thin.....
A nuclear error, but I have no fear
'Cause London is drowning, and I, I live by the river"
(Sources disagree whether Joe sings "error" or "era", but it sounds like error to me. Bet they are American websites that have "error" as "era"!)
No comments:
Post a Comment