From Jonathan Bayes, consultant Chief Investment Officer, Partners Wealth Group.
I was asked to put a piece together for investors that surmised how asset markets and indeed economies have fared in the wake of Britain’s surprise BREXIT vote in late June 2016.
At the time, the decision was seen as a shock to the system (political and financial) and a surprise rejection of both globalisation and a united Europe from a disgruntled British electorate. We have since seen these sentiments carry sway in the United States, with the election of President Trump on an unashamedly nationalist agenda.
Though this nationalist movement has taken ground in many western countries over the past 12 months, the election of a centrist President in France, and perhaps emergent evidence in both the UK and United States that the grass isn’t always greener, has left the question over globalisation’s future entirely unresolved.
But even in spite of the political uncertainty that has bubbled to the surface in the past 12 months, global economies have in fact done surprisingly well.
On the day of BREXIT just over 12 months ago when the British Pound lost -12% and all manner of world trade fears seemed confirmed, it might have been hard to envisage that share-markets the world over would have performed as successfully as in fact they have. The UK FTSE itself has risen +12% and the U.S S&P500 is up +13% in the past year. In Europe, share-markets are up +20 – 30% and buoyant on what has been a constant improvement in both the European domestic economy and global industrial activity in that time.
Germany’s economy is going gangbusters. Both business confidence and consumer confidence are at record highs, and unemployment has fallen to a low of 5.7%. This is a far cry from conditions seen less than 2 years ago when Germany was beset by legions of Syrian refugee’s, and anti-immigration rhetoric was at a depressing high. Driving the German economy higher has been its export exposure to an improving Chinese and American economic situation, and the steady rise in local housing prices which has underpinned consumer confidence.
In other parts of Europe, activity is also improving. In France, business sentiment is at a 6-year high, and though unemployment there and in other parts of Europe such as Italy and Spain has yet to fall as substantially as it has in Germany, economic activity is certainly as good as it has been in 5 years or more.
Where there was much concern about the potential for fragmentation of the European Union post Britain’s rejection, those fears now seem well and truly forgotten.
In the UK however, things look far less optimistic. Yes the share-market has risen by +12%, but with an incredibly high concentration of global titans across the financial, oil, pharma and consumer goods space, the FTSE share-market undeniably benefits more from the Pound’s weakness than it is negatively impacted by uncertainty created by BREXIT.
UK property prices are falling and consumer confidence is weak. Britain’s open, island economy is highly dependent on financial services, and the associated uncertainty relating to just how Britain’s banking system will be treated by European authorities in the months and years to come has cast a pall over the banking system and the consumer behaviour of those employed in that sector.
More broadly, capital expenditure intentions have been put on hold until corporates can know with certainty on what terms trade with Europe will be done. Almost 45% of all of Britain’s exports are sent to the European Union, making the upcoming BREXIT ‘deal’ talks of enormous importance.
Of further concern, the substantial fall in the Pound has begun to push up prices of imported goods. Where the rest of the world struggles to push inflation sustainably to 2% or more, the UK has seen a surge in core inflation in the last 6 months to take headline inflation rates to +2.9% and their highest level in 5-years. This adds to the policy burden in the sense that the Bank of England are now faced with the very real prospect of stagflation – rising inflation and falling economic growth – and with that likely economic recession.
In Australia, the impact of BREXIT has been minimal. Trade with the UK is 2% or less of our national total, and a fraction of the importance it once was.
Similarly the Australian share-market is far less exposed than it has ever been to the UK economy in terms of foreign subsidiary earnings in British Pounds.
Like the global economy around it, domestic Australian business conditions have continued to improve and now sit at their highest levels since the GFC. The ASX200 is +10% in the past year.
So all in, the 12 months post-BREXIT proved to be far less concerning than many of us, including myself, foretold. With growth now strong and central banks in the United States and Europe posturing towards a further tightening in monetary conditions, perhaps the coming 12 months will prove to be more difficult.