The Impact Of Brexit On The Finance Industry In The EU And Globally

The Impact of on Brexit the Finance Industry in the EU and Globally

When the majority of British and Welsh voters decided it was time for the UK to leave the EU the UK's Prime Minister David Cameron did the decent thing and resigned the day after the referendum. Scotland called for another referendum on independence and Northern Ireland muted a similar wish. Brexit, plus no doubt the possible fragmentation of the United Kingdom, sent the global financial markets into wild fluctuations.

Brexit

The political process that will be triggered when Article 50 of the Lisbon Treaty is put into motion to negotiate the UK leaving the EU will be slow and painstaking and will keep civil servants and government ministers busy for months. Although the referendum is not legally binding it is unthinkable that the majority of voters would be ignored and that a move to exit the European political and economic union will not come about by October or sooner. The actual process of negotiations to disentangle the UK from the EU could take more than two years.

A day of shock on the markets

The financial markets reacted the moment the announcement was made that the UK had voted to leave the EU. As there is no precedent for a Brexit, the global market could only react to the uncertainty that Brexit had created. The market did a dramatic so-called "dead cat bounce", that is, it reacted once to the shock of the result and then reacted again at the shock the reaction had created. The pound fell as much as 10 per cent against the dollar, to levels not seen since 1985. Fears were fuelled by the unknown: Brexit could hit investment in the world's fifth-largest economy, threatening London's role as a global financial capital, and months of political uncertainty would follow. The Governor of the Bank of England Mark Carney did his best to allay fears, but the currency markets reacted like proverbial yo-yos. Thomson, for example, put a limit on currency buying at £1,000 during the afternoon, while the euro slid 3 percent.

World stocks had more than $2 trillion wiped off their value on Friday 24 June 2016; indices across Europe took the sharpest one-day drop in their history. Britain's major banks took a $100 billion battering, Lloyds, Barclays, and the Royal Bank of Scotland, falling as much as 30 percent during the morning. Global flight to safer assets was prominent and gold futures rose more than 8 percent at one point in the day.

Asia was rocked by the result as well, the Nikkei fell by 8 per cent, and as the pound plummeted to a thirty-one year low against the dollar ? more than 6 percent to $1.3629 at one point in the day ? the dollar index rose by 3 per cent at one point. The markets are volatile and this is to be expected.

What was the point of Brexit?

In hindsight, would it have been better if the Remain campaign had focussed on this short-term shock? Could it have been foreseen that this reaction was inevitable, scary enough for a rollercoaster ride, but inevitable? While the Remain campaign tried to scare the voting public with warnings of long-term instability, the Leave campaign seemed certain that Britain could and would weather the shock and the storm regardless. It seems we all need to believe that. Already there are winners and losers, but short-term gain or loss was not the objective of Brexit. Brexit was to secure the long-term future of the UK.

Winners

Despite the turbulence today, a number of FTSE 100 stocks ended the day positively. These include drugs manufacturers GlaxoSmithKline and Astra Zeneca, both of which rose by more than 3%. British American Tobacco, Unilever, and publisher Pearson also made gains. Laith Khalaf, analyst at Hargreaves Lansdown asserted that winners were "predominantly companies with lots of overseas earnings, which stand to benefit from a weaker pound."

Losers

The UK's biggest losers were house builders, accounting for four of the five biggest losses on the FTSE 100. Investors, who apparently saw construction as the more exposed to UK economic shocks, hit Taylor Wimpey (minus 29%), Persimmon (28%), Barratt (24%), and the Berkeley Group (21%). British Airways (IAG) was minus 23% after it issued a profit warning following the referendum result. Major UK banks were hit too: Lloyds fell 21%, Barclays and RBS both slid 18%, but HSBC only fell by 1.4% because it is protected by its Asian interests.

European losers

The European markets suffered worse still, the Dax in Frankfurt fell 6.8% (the worst day since 2008), the Cac in Paris fell 8%, Madrid by 12%, and Milan down 12.5%. Greece suffered even greater losses.

The future

There are bound to be short-term winners and losers, but the UK did not vote to leave the EU for short-term gain. The UK took the decision to leave the EU in order to build its own future for government, economic stability, and business prosperity. It left to negotiate new trade deals with the rest of the world, disconnecting itself from an unstable Europe, and taking back power over its own destiny, its laws, immigration policy, and so on. The chair of JCB, Lord Bamford, a supporter of Brexit, believes that as the world's fifth-largest trading nation, the UK has "little to fear from leaving the EU: ... we should look ahead to opportunities to trade more freely with the rest of the world, as well as building on existing trading relationships with customers and suppliers in Europe."

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.