EDITOR'S LETTERMerryn Somerset Webb
Brexit – a symptom of a global problem
The stockmarket has collapsed. Our borrowing costs are soaring. Our economy is imploding. The pound is in free fall. So say the UK’s newspaper headlines. It’s scary stuff. Luckily it’s also not quite true. Sterling has been nastily hit – but as most economists will tell you, given the current-account deficit, it was nastily overvalued already. A fall isn’t all bad. As for borrowing costs, as we note in our cover story, they have in fact fallen, and the FTSE 100 has now almost fully recovered from its post-Brexit slump, although the FTSE 250 is still somewhat lower.
This is volatility, not collapse – the market is working to find new prices for assets to reflect unexpected change, just as it is supposed to. Will it turn into something worse? It isn’t our core expectation (we’re pretty optimistic on Brexit). But, of course, it might. And the longer it takes the establishment to adjust to our new political reality – the fact that a small majority of UK voters really do want to leave the EU – the more possible it gets.
Most media hasn’t quite adapted. News shows are still dividing participants into Leavers and Remainers and debating pre-referendum arguments. Rather too many politicians haven’t either: denial tactics include oddly anti-democratic demands for a second referendum, or suggestions that we wait to invoke Article 50 for long enough for some other event (what?) to mean that we never have to.
These are feeble distractions from the main point: the kind of deal an exiting UK wants in terms of sovereignty, trade and migration (the three things that matter), and how close the UK can get to having that deal. Our elites will come round to this at some point. We suspect Europe’s will too. There is no crisis yet – it has only been a week since the vote, after all. But the quicker the better.
Investors would also be wise to remember that, while it might feel like it in London, Brexit is in fact less of a problem in itself than a symptom of the real problems in the global economy. There is the retreat from free trade and globalisation (which I hope our negotiations with the EU don’t add to). There is the global debt problem; the probably insolvent Italian banking system; the demographic troubles unfolding in developed economies; the weakening of the Chinese currency (which exports deflation around the world); the extreme monetary policy all around us (more than 80% of Japanese government bonds now have negative yields!) and the bubbles that result from that monetary policy.
We weren’t particularly bullish on most markets pre-Brexit for all these reasons. There are more cheapish stocks around now than there were a few days ago. That’s good. But we aren’t particularly bullish now either.