As the UK lumbers inexorably towards the triggering of Article 50, anyone with a financial stake in proceedings – all of us, in other words – has been guessing at the economic fall out.
The professionals are no exception; much as they avoid the word, the predictions of economists, analysts and financial advisors depend heavily on intelligent guesswork about what will play out.
Brexit requires more guesswork than normal. On the one hand is a hard exit, with the UK denied access to the single market and subject to the same World Trade Organisation rules that govern countries beyond the EU. On the other is a re-negotiated Brexit-light; with a de facto single market membership maintained in exchange for some UK concessions on immigration. In between, the range of deals, the wider economic context, and the variation in how asset prices will react is bewilderingly diverse. What have we learnt so far?
Equities and bonds
“Probably the dominant feature of the UK economy since the Brexit vote has been sterling’s weakness,” says Laith Khalaf, a senior analyst at Hargreaves Lansdown. It will remain key to the performance of UK stocks, which has broadly diverged since the Brexit vote. Firms with incomes from abroad – miners, energy stocks, and big international brands like Burberry and HSBC(1) – have gained, as a weaker pound boosts the value of their international earnings. Those relying on UK sales have lost out.
The sterling slump has also forced investors to look at the currency their assets are based in. Those UK investors in dollar or euro-denominated holdings – from stocks to funds to houses in the Hamptons – have enjoyed a healthy boost. If a hard Brexit drives sterling weaker, this should continue. If the negotiations run in the UK’s favour and current caution prove excessive, the gains will recede.
Beyond that, markets remain fairly confused about the consequences of a UK exit. They showed themselves terrible forecasters when it came to the referendum in the first place, estimating a one in five chance of a vote to leave, according to Matt Beasley, head of global equities at Henderson.
Even when the vote was known, many analysts and fund managers were calling bad news for equity and bond markets, notes Khalaf. They couldn’t have been more wrong. By the start of December the FTSE 100 was 7% higher than on the day of the referendum; a gain that almost entirely matched its performance over the same period before the vote.
The UK may be their home, but the health of UK plc matters relatively little to affluent Brits, whose stock and bond portfolios are typically diversified around the world. In this regard, the path of asset prices as Britain and the EU divorce will be far more influenced by the world’s largest two economies – the US and China.
In recent years, a big part of the appeal of US assets has been the strong dollar. It has been on a remarkable rise in recent years, gaining 40% since 2011(2) against a basket of rich world currencies. The election of Donald Trump boosted this appeal. His pledge to increase infrastructure spending and cut taxes increases the likelihood of inflation, and – in turn – a gain in interest rates. This will pull international investors into US bond markets, in search of a better return for their money (since interest bearing assets, such as US Treasuries will now yield more), increasing demand for the dollar. This process has already seen the dollar gain roughly 4%(3) in the month following the election. Trump’s stimulus package is good for US stocks, too. Buoyed by the prospect of wide scale economic stimulus, by Thanksgiving (24 November) the four most important US stock indices, the S&P 500, the Dow Jones Industrial Average, the Nasdaq Composite and the Russell 2000, had all reached all-time highs, for the first time since the end of 1999(4) .
The most valuable non-sterling assets for many affluent British are their holiday homes. Further sterling weakness, should dampen demand for second and third homes across Europe and the US, but see current owners sitting on big paper gains. Those considering ski chalet purchases this winter, for example, have already balked at the real price inflation implied by the weaker pound. Transaction volumes in prime alpine spots popular with UK buyers have faltered as a result, say agents. When it comes to UK property, though, professionals seem a little more confident that a soft Brexit is bad for prices and hard Brexit is worse. “Few would bet against a drag on house prices, debt availability and transaction levels,” said Lucian Cook, in September, Head of Savills Research. The pain would be worst, he reckoned in “London’s hitherto runaway housing market.”(5)
The referendum outcome has already rippled through the UK housing market in contradictory ways. In the immediate aftermath, the Royal Institution of Chartered Surveyors (RICS) reported that price inflation, new listings, enquires and sales all fell nationwide(6) .
But by its latest November report, only in central London and the North East were more surveyors reporting price drops than price gains(7) . Elsewhere – and this will encourage affluent Brits with a well-distributed buyto- let portfolio – a shortage of supply has been inflating prices, seemingly regardless of the deeper economic consequences of a UK exit(8) .
So far, London’s market pain has been concentrated at the centre, and worst at the top. November was the eighth successive month in which the RICS measure has been negative for the capital. Sales of homes worth more than £10m collapsed in the year to November, dropping 86%, according to the RICS. This should bother top end agents, who have made a habit of pinning price falls in London and – to a lesser extent – the southeast in terms of stamp duty reforms of December 2014. Worse, the recent sudden fall in sales spans a period in which sterling has weakened, increasing the appeal to affluent foreign buyers, who make up a good chunk of this £10m- plus market.
Trevor Abrahmsohn, of Glentree Estates, who has personally sold more than £2.4bn worth of property since 2004, reckons this period is now past, and affluent foreign buyers are already calling the bottom of the market. Over the last year, he reports significant discounts on properties above £10m in London, consistent with the RICS figures. “Within the Chinese community, word is out that London is cheap; they are coming back to buy” he says. Lucian Cook of Savills isn’t so sure. Central London prices will remain flat through 2017 and 2018, he predicts. Those within a 90-minute commute of the city centre will fare better – averaging 1% in 2017 and1.5% in 2018. But this is a long way short of the hefty gains that top end owners have become used to(9) .
3. against basket of rich world currencies