The largest financial event to affect world markets in years took place on June 23, as British voters decided by referendum to leave the European Union, in a move the media dubbed Brexit.
With the vote anticipated to re-affirm the UK’s membership in the Union, the actual vote of roughly 52 percent in favor of leaving was a shock to world governments and financial markets.
Economic indices reacted immediately, with the value of the pound falling to its lowest level in 31 years and the FTSE 100 (the British equivalent of the Dow Jones average) falling by 550 points, or more than 8 percent, in the first few hours following the vote.
Credit ratings agency Standard & Poor’s downgraded the U.K.’s AAA credit rating by two levels. British Prime Minister David Cameron announced his resignation within hours of the vote, and it was widely expected that a new leader from the Conservative Party (initially suspected to be former London mayor Boris Johnson) would take his place within four months.
By June 30, bargain hunters had caused markets to reverse course, and within the week, the FTSE was at a record high for 2016 of greater than 6,500, more than 2 percent higher than its pre-Brexit level while the pound shed more than 9 percent of its value and continued to fall.
The pound’s lower value made many British stocks more attractive, and analysts say that a good number of issues will recover most of their pre-Brexit values if they haven’t already.
Numerous investors have been buying shares of British staples Lloyds Banking Group, Royal Bank of Scotland, Barclays and ITV. The head of the Bank of England, Mark Carney, said that BoE interest rates — already at historically low levels of 0.5 percent — could be cut again over the summer, driving the value of the pound higher against the dollar and the euro.
In the meantime, most other stock indices around the world have fallen. Long-term, industry experts say that uncertainty fueled by Brexit over the new British government, U.K. trade policies and the outlook for the City of London — the capital’s business district — will inhibit growth and possibly fuel a recession within the next several years.
Many companies are waiting for the “dust to settle” with the UK-EU relationship and to see how major players will respond before making announcements as far as trading decisions, possible relocations and/or layoffs.
It also remains to be seen if the referendum will be 100 percent binding as legally the parliament is not obligated to follow the will of the voters, although historically there’s been a strong precedent for doing so.
The press has announced that between one and two million people who voted for leaving the EU now apparently “regret” their vote, and online, a petition to hold a second referendum has gotten four million electronic signatures (of which more than 75,000 were deemed to be fraudulent).
However, both the office of the Prime Minister and Home Secretary Theresa May have said the first referendum will be followed and that a second referendum will not be held in the near future.
From an electoral perspective, gathering clicks on social media is very different from getting people to turn out to the voting booths, and there’s no evidence that if a second referendum were held today that the outcome would be any different.
However, exit polling indicates the majority of those who voted for leaving the EU tended to be older, working class and white, whereas those voting to remain in the EU tended to be younger and more diverse demographically.
In a surprise development, Boris Johnson, the odds-on favorite to replace David Cameron as British Prime Minister, stated that he would not seek the post, adding further chaos to the fallout of Brexit.
Immediately following his decision, Johnson’s most important former supporter, Lord Chancellor Michael Gove, announced his own candidacy for the office.
Now, as many as five candidates, all members of the UK parliament, are expected to vie for the role. This additional uncertainty has put additional pressure on the value of the pound as the five have divergent policy plans that they’ll have to try to sell to voters.
It certainly hasn’t helped that various EU politicians have requested the UK to effect Brexit “as soon as possible,” in the words of EU Parliament President Martin Schulz and others.
This means that the EU would like Britain to invoke Article 50, the formal and irrevocable legal procedure for an EU member state to withdraw from the Union, prior to the U.K. election for the new prime minister taking place in October.
While this may be for the benefit of resolving trade policies and calming markets, it won’t necessarily help the confidence of UK investors; in fact, the post-Brexit rally that’s occurred in the immediate aftermath of Brexit will eventually taper as the date for enacting Article 50 draws near.
Martin Wolf, head economic analyst for the U.K.’s Financial Times stated, “[Brexit] hasn’t resolved uncertainty; it’s created it… The natural thing to do is to retrench, to be cautious, to invest less, to take money out of Sterling assets, to disinvest — to the extent [investors] can — from the U.K., given these huge uncertainties. We’re seeing some of these effects already, with the very large fall in the pound… Beyond that, we’re going to see a sustained period of economic weakness in the U.K. as investment decisions are postponed.”
John Van Reenen, the director of the London School of Economics’ Centre for Economic Performance, said of the short-term outlook, “You get a rabbit-in-the-headlights phenomenon where businesses don’t want to make new decisions, or new investments, because they are uncertain about the future. The immediate effect will be a lowering of investment activity, a lowering of hiring. There will an immediate slowdown of growth.”
