Why do I dream of Brexit?
Well, I am an investor and trader from the UK, and for nearly 5 years, the talk of potentially leaving the EU after 40 years, undoubtedly will impact on me and my children. Good or bad, no idea, but it isn’t easy to navigate the effect.
The one phrase that resonates, “it’s like a divorce”, anyone been through one knows it can be emotional, messy, expensive, and often long. This has been the case with Brexit and more, and it isn’t over by a long way.
What are the potential outcomes for the trader and investor?
No doubt, the markets are built on confidence and with the added ingredient of Covid19, things are starting the smell iffy for the UK now.
So, what has been the impact, and can I take any advantage trading it or investing?
Immediate impact on the UK economy
According to one study, the referendum result had pushed up UK inflation by 1.7 percentage points in 2017, leading to an annual cost of £404 for the average British household. Studies published in 2018 estimated that the economic costs of the Brexit vote were 2% of GDP.
Short-term macroeconomic forecasts by the Bank of England and other banks of what would happen immediately after the Brexit referendum were too pessimistic. The assessments assumed that the referendum results would create greater uncertainty in markets and reduce consumer confidence more than it did.
Economists have compared short-term economic forecasts to weather forecasts whereas the long-term economic forecasts are akin to climate forecasts. 😊 They got it wrong, same as my trades.
Ok, now we are coming to the crunch.
Long-term impact on the UK economy????
There is overwhelming or near-unanimous agreement among economists that leaving the European Union will adversely affect the British economy in the medium- and long-term. Heard that before. Surveys of economists in 2016 showed overwhelming agreement that Brexit would likely reduce the UK's real per-capita income level. Ok that is a worry.
Will my buying power reduce with a depreciation of my currency?
Obviously after the referendum the Pound depreciated strongly, and although some say that’s good for the exporters, a no Brexit deal, will send further alarm bells ringing for all.
Will big business move to the continent?
Following the Brexit referendum, many companies shifted assets, offices, or businesses operations out of Britain and to continental Europe. By the beginning of April 2019, banks had transferred more than US$1 trillion out of Britain, and asset management and insurance companies transferred US$130 billion out of Britain. This cannot be good news for the economy in the long term, once they leave, what will make them want to return. Is the financial dominance over, as the money capital of the Western world? I still believe in the UK and many overseas investors do also. Money moves.
Foreign direct investment
Not all doom and gloom, the UK is an established democracy with much innovation, and I am sure investment will return, but how long and what will the impact be on the markets?
European experts from the World Pensions Council (WPC) and the University of Bath have argued that, beyond short-lived market volatility, the long-term economic prospects of Britain remain high, notably in terms of country attractiveness and foreign direct investment (FDI): "Country risk experts we spoke to are confident the UK's economy will remain robust in the event of an exit from the EU.
So, to the crunch.
Stock markets and currencies.
When the London Stock Exchange opened on Friday 24 June 2016, the FTSE 100 fell from 6338.10 to 5806.13 in the first ten minutes of trading. It recovered to 6091.27 after a further 90 minutes before further recovering to 6162.97 by the end of the day's trading. This equated to a fall of 3% by the close of trading. When the markets reopened the following Monday, the FTSE 100 showed a steady decline, losing over 2% by mid-afternoon. This followed a global sell off, but eventually the markets recovered, breaking record highs. Trump!!!
The UK Stock market fell became volatile but has made a steady recovery. Was it a correlation with the fall of Sterling or deep down, investors still believe in the UK economy and business innovation?
On the morning of 24 June, the pound sterling fell to its lowest level against the US dollar since 1985, marking the pound down 10% against the US dollar and 7% against the euro. The drop from $1.50 to $1.37 was the biggest move for the currency in any two-hour period in history. The pound remained low, and on 8 July became the worst performing currency of the year, against 31 other major currencies, performing worse than the Argentine peso, the previous lowest currency.
But it has stabilised, with some short-term volatility, and depending on the