What next for the markets?

Merryn Somerset Webb gives some hints as to things to watch out for in the markets in the wake of the Brexit vote.


Expect a fudge

I'm starting to quite like referendums. That might be partly because I've been rooting for the winning side in the last two (I voted for Scotland to stay in the UK and for the UK to leave the EU). But it is also because they represent something of a triumph of democracy.

Both the Scottish referendum and the EU referendum have been pretty uncomfortable, but they've also made the UK more politically engaged than I can ever remember it being before: a turnout of over 70% for any vote in a country that has been fretting about low turnout rates for decades is something to be genuinely celebrated, however you feel about the result.

The way we run these plebiscites, though, does come with a problem: huge change can be too easily forced by a very small majority. Look back to the Scottish referendum of 1979 on devolution. Then, 51.4% of those who voted, voted for devolution. They didn't get it. Why? Because it wasn't just about getting 50% of the vote. To win, the nationalists also had to have 40% of the total electorate voting yes. Turnout was 64%, something that meant that only 33% of the electorate actually voted yes.

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That, in essence is a pretty good system. It means that if there is to be major change there has to be a pretty strong mandate for it. This brings me to Thursday's vote. In this referendum, 51.9% of the turnout voted Leave. That's good. But it's still only 37.4% of the electorate. Is that enough for full Brexit?

I'd expect a fudge. Note that Article 50, which starts the process of negotiating a new deal with the EU, is not to be invoked immediately. This was an advisory not a legally binding referendum, so there's no rush. David Cameron has made it clear that this will be for his successor to get on with.

The EU is unlikely to want to see the UK actually leave (it's difficult, hard work, it's boring and it sets a rubbish precedent). Its leaders might also spend the weekend slowly realising that genuine reform might be no bad thing. Today they talked tough to tell us that there will be "no renegotiation". That doesn't preclude some actual reform of the kind almost everyone wants after all the current EU isn't the only possible kind of EU and the UK to be given a chance to vote again. The EU has form in this area.

Either way, the UK will now definitely be a member of the EU for at least 28 more months and then, after months of mind-numbingly boring negotiations it will one way or another have a perfectly reasonable trading relationship with the EU.

That's obviously not how unscary things would look to someone with a chart of sterling and the UK stockmarket on Friday morning. Their first glance would have shown the FTSE 100 and the pound down 8% and 10% respectively.

However, had they looked a little further back they would have noted that the FTSE was lower in February than it was by the end of this week and that both the FTSE and sterling ended Friday not so far from where they closed last week. Like most mini-market panics, this turned out to be short-lived stuff.

So what happens next? I can't tell you when your UK passport will stop working, whether Scotland can find a way to stay in the EU and in the UK, or who the next Tory PM will be (all questions I was asked on the radio at various points on Friday). But I can give you some hints as to things to watch out for in the markets.

The first is much looser monetary policy. The Bank of England has already started to talk about "liquidity injections". This vote is set to provide the world's big central banks with a good excuse to do what they have been hoping to do for a while get on with the next round of money printing. This will be good for some markets (maybe Japan) and some stocks.

The second is the weak pound. Sterling has been unsustainably high for years now, as evidenced by our out-of-control current account deficit, and was set for a fall however we voted. It's no bad thing: it should mean booming profits for our exporters (you might want to buy some of them), some inflation and maybe even a rise in wages. All good unless you had been waiting to buy holiday currency until after a Remain vote.

The third is overpriced markets think US equities, perhaps. Anything that has been a balloon looking for a pin will find one more easily in the Brexit volatility than it might have before. Sometimes a market needs a crisis as an excuse to correct and any old crisis will do.

The last is Europe, home to politics and markets that make a Brexit-voting UK look like one hell of a safe haven. Our vote is going to make other countries demand referendums, do nasty things to their sovereign bond markets and accelerate the demise of the current phase of the whole project. There's a reason European stockmarkets fell more than the UK's on Friday.

Finally, a word on gold. If you followed my advice at the beginning of the year you'll be holding more than usual. And it will be doing exactly what it is supposed to do protecting your portfolio in times of (other people's) panic. It rose 22% in sterling terms overnight on Thursday.

I have been writing here for years about the mega-global challenges surrounding us at the moment demographics, deflation, debt and the popular disillusionment with all three. These are all still with us. That means there will be many more shocks ahead. Elections in all five of the largest euro area economies in the next 18 months are going to give other populations opportunities to reject elites for starters. The good news is that UK, as the last few days have proven, is a safe, stable and highly active democracy. That along with a little gold should help us cope.

This article was first published in the Financial Times

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.