Brexit and the Bull

x Sponsored content on Research Live and in Impact magazine is editorially independent.
Find out more about advertising and sponsorship.

A year after the great fall of China and global markets are testing new highs, with all three US indices hitting a record and the FTSE 100 flirting with the psychologically important 7,000 level – a record reached in December 1999 and only momentarily touched again in April 2015.

The backdrop to this bull market? Why, Brexit and lower interest rates for longer. Dire warnings from the Organisation for Economic Cooperation and Development, the International Monetary Fund and the Bank of England (BoE) – and even Barack Obama’s threat of ‘the back of the queue’ if the UK voted to leave the European Union – have given way to monetary stimulus from the BoE, and a widely expected fiscal loosening in the Autumn Statement. The City is expecting a reduction in stamp duty to boost the property market, spending on infrastructure projects to bolster growth and employment, and lower taxes. So how did we get here? 

The former government’s Project Fear turned to Project Terror the week before the EU referendum, when the previous Chancellor, George Osborne, threatened voters with higher taxes and lower spending if they voted Leave. Some in the City saw that as the political equivalent of a CEO (for whom read the Prime Minister) and a CFO (the Chancellor) threatening shareholders with a dividend cut if they voted against their strategy. In situations like this, it is the dividend that survives, not the management team – and it turned out to be the same with the referendum and the electorate. The market closed up 43 points (+0.75%) on that fateful day, as Project Terror began to backfire.

The Remain campaign failed to articulate any positive reasons for staying in Europe. From the outside, it appeared that the former leadership – after an unexpectedly positive result in the Scottish Referendum in 2014 and in the General Election last year – pushed its luck with an early referendum, and that luck ran out.

Political views across the City were clear cut: those who worked for a bulge-bracket bank, a multinational organisation or a global professional services practice were Remainers, who believed Brexit would be the end of the world as we knew it. Those who had risked their own capital to create a business, and who despised bureaucracy and a lack of accountability, were Brexiteers who saw a world of opportunity and growth beyond Europe. 

So why are the markets so sanguine, given an uncertain backdrop and division of opinion? Well, it was always a political crisis, not a financial maelstrom, and the Brexit-induced weakness in sterling was a positive for the market ( 70% of FTSE 100 profits are dollar-denominated), for tourism and staycations, and exports. Further, the BoE stepped in early – in late June – to stabilise the market with the prospect of stimulus and a promise that it would do “whatever is needed” to support growth. Then, in early August, it lowered interest rates to 0.25%, boosted its quantitative easing (QE) scheme by £70 billion and committed an extra £100bn to encourage banks to lend. The prospect of cheaper money and easier credit pushed the FTSE 100 up 105 points ( 1.6%) on 4 August, to within a whisker of a new 12-month high.

This was followed by data that showed the unemployment rate had remained stable, at 4.9%, in the three months to June and total employment had risen to a record high of 74.5%. 

The UK’s retail industry grew in July, with a 1.4% increase in volume over the month compared with June, and an increase of 5.9% from the previous year. Further evidence of consumer spending picking up came in July, with the Visa consumer spending index increasing +1.6% year-on-year in July, the biggest rise in three months. 

Additional data showed that UK industrial production remained stable in the run-up to the Brexit vote and, in late August, the CBI monthly Industrial Trends Survey showed manufacturing bolstered by exports and output growing while orders remained solid.

So actions spoke louder than words and demonstrated that, post-Brexit, consumer confidence was undented.

At the Rio Olympics, Team GB won more golds than any nation except the US, the world’s biggest economy. With long-term planning, investment and focus, GB has become a sports superpower. Now, the same kind of meticulous preparation and planning must go into forging new trading relationships and exiting the EU. With currently more Olympians than trade negotiators, however, we need to find more of the latter. 

Lorna Tilbian is executive plc director and head of media at Numis Securities