Brexit two months on - Our expert gives his opinion

Tuesday 23 August 2016

Exactly two months ago the UK referendum delivered a stunning EU exit, so how has this affected the financial markets both in Jersey and across the world.

Investment Manager Oliver Stones of Quilter Cheviot offers the Express his views on where the EU departure is leading us.

Mr Stones said: “So here we are, two months to the day after the shock of the Brexit vote in the UK to leave the EU. Has the world stopped turning? Have we had a plague of locusts? Fire and Brimstone anyone? No, the world scarcely blinked and the mantra ‘don’t panic and carry on’ was strictly and impressively observed everywhere.

“With a proverbial shrug-of-its-shoulders the markets returned to work, business as usual. What has become abundantly clear in the marvellous thing that retrospect is: Is that the ‘Remain’ campaign’s pragmatic musings on the negative economic effect of a Brexit won a lot of ‘heads,’ but (and here’s the rub my friends) their ‘campaign fear’ singularly failed to win them any ‘hearts’ and this is where Brexit supporters cleaned up

“There is now a rather smug cacophony of “told you so’s” from Brexit campaigners and well there might be, with the FTSE 100 up approximately +15% since the sharp fall in the UK top 100 shares post-Brexit and our Sterling currency still hovering around the 1.32 versus the US Dollar and 1.16 versus the Euro. Whilst this 11% fall versus the USD, for example, has had a significant effect on Corporate UK it has actually helped our foreign-earners and given them an unexpected earnings bonanza this year as it has too to UK exporters.

“As if to confirm this bon viveur - today we saw the results of Persimmon PLC, one of the most severely hit UK house-builders who at one point post-Brexit saw shares down 39%. This was an extraordinary sector sell-off, understood by few, in a market where there was supposedly a gross under-supply of new UK housing in the face of clamouring and ever-increasing new housing demand. It was estimated pre-Brexit that there would be demand for 300,000 new homes in the UK per-year for the next two decades, but actual new builds going up would be closer to just 120,000. Forgive me for being economically naïve and only possessing a Smarties calculator  - but shouldn’t prices rises in such an environment benefit the builders?

“So here’s the deal today. Persimmon’s trading numbers were unassailably strong, with an impressively growing order book and actual sales up 17% with, most importantly, a strong trading background and forward guidance. What was all the fuss about? Today, at time of writing, their shares are up 40% from their late June lows.

“As if this wasn’t enough, this Friday we see confirmation of the UK’s Q2 2016 GDP economic growth numbers and interestingly the market is so much more confident two-month post Brexit, predicting a 0.6% quarter on quarter growth rate making an annual growth rate of 2.2%. That hardly represents the Remain camp’s dark and dire warning of an inevitable recession!

“But before we hop over the Rorke’s Drift cow dung walls in our Red tunics singing ‘Men of Harlech’ to chase off the initial wave of unsophisticated and morally-defeated Remain-campaigners, bear in mind the 1,000 hidden Impis of Remainers in the long grass. Firstly, the currency. Who went to Europe this year? We holidayed in sunny Spain and calculate our overall holiday was between 20% and 30% more expensive. One of the reasons for this is the poor old tourists have their proverbial eyes ripped out when it comes to tourist FX rates. You and I are now lucky to get parity with the Euro for your hard-earned sterling.

“But I’m afraid that does not even feature in the bigger macro-economic picture. The fall in Sterling has already set the dark forces of inflation in motion. The UK imports 60% of its foodstuffs, the Channel Islands even more. The weaker Sterling falls so the cost of those foodstuffs rise, those shoes and apparel prices rise, those general imports prices rise. Here are the recent hard inflation facts and then I’ll stop spoiling the post-Brexit ‘nothing-to-worry-about’ Party.

“Inflation measured by the Consumer Price Index (CPI) is creeping higher, up to a level of 0.6% year-on-year. Hardly inflation-Armageddon I grant you, but it’s the other less well known measures that worry me. The Retail Price Index (RPI) which is a much more far-ranging and goods-inclusive inflation measure, more relevant to you and me and the person in the high street that is my inflation canary-in-the-mine. RPI was 1.9% year-on-year at its last recent reading this month.

“But even more importantly let’s look at the Producer Price Index numbers (PPI) and here the gassed canary in now unconscious at the bottom of its cage as input prices are now sky-high (remember the strength of Sterling rule-of-thumb and import prices?) at up 4.3% annually! This means that raw material costs for the producers have risen exponentially but have they passed these costs onto the consumer at the factory gates? No, they can’t yet, output PPI actually fell 0.4% annually which is obviously economically unsustainable and a sign of impending long term domestic manufacturing malaise in which a technical recession in the UK is still highly likely over the next 24 months, with a strong whiff of ‘stagflation’ about it; meaning zero to negative growth and rising inflation.

“The value of Sterling on a trade-weighted basis and domestic UK inflation are inextricably linked I’m afraid and we cannot hide from the facts, as they are already showing themselves. But there are knights-in-shining armour who could dash to help, and none so more than the mostly diligent, hard-working and stoical UK worker, both in manufacturing and the enormous service sector. With economic growth still respectable, a sympathetic and pro-active central bank, a strong employment market and companies like Persimmon surprising on the growth upside, there is still a good chance that the global ‘hot money’ sloshing around the world will flow back to the UK and we could see Sterling regain ascendency against the other G7 currencies, and imported inflation capped. Secure for the moment behind the walls of Rorke’s Drift from the enemy, we await the next onslaught.”