The way the markets have reacted to Brexit, you’d be forgiven to wonder what the fuss was all about.
The FTSE 100 is back to where it was before the UK voted to leave the European Union, while yields on UK government bonds have reached historical lows, in a sign that people are buying UK debt rather than dumping it like a hot potato.
It’s true that the FTSE 250, which is more exposed to the domestic economy, and the pound, are still lower than before the vote, so perhaps we should take these as signs the market still worries about the consequences.
Despite this, there are many voices who now proclaim that the market has already “priced in” Brexit. Nothing could be further from the truth.
First, take a look at British politics. The Prime Minister has resigned, and those who vie to be his successor do not include the main driver of Brexit, former London mayor Boris Johnson, who said he would not run for the leadership of the Conservative party.
The favourite is Theresa May, the current Home Secretary. However, she was on the Remain side, so her legitimacy is likely to be questioned.
Secondly, and despite what the Leave campaigners told their voters before the vote, there is no plan. None. Not even the draft of a plan. Of course, it is very possible that people who voted to leave the EU realised this, and did not care. However, for the markets the lack of plan will become more and more unpalatable as uncertainty lingers.
Already, some companies – airlines such as easyJet or WizzAir – said they would either move their headquarters in the EU or stop investing in their UK operations.
Investment bank Goldman Sachs said that if the City loses its passporting rights, which under EU law allow financial sector firms headquartered in London to do business anywhere else in the EU, it will have to “adjust” its “footprint” and reconsider where its people are located.
Real estate agency Foxtons, focused on London, warned after the Brexit vote that the result of the referendum had increased uncertainty and the trend will likely continue for the rest of the year.
And that is the biggest problem. A collapse of the housing market is the worst danger for the UK economy right now. Consumer confidence had been underpinned by ever-increasing house prices for a very long time, as people took equity release or other forms of borrowing against the value of their houses to buy various goods, take holidays, etc.
There are already estate agents sending emails to buyers explaining that this is the best time to buy property, while predicting increased interest from foreign investors enticed by the falling pound.
Suddenly un-cool
The government and the central bank were quick to take defensive measures, as well. Chancellor George Osborne abandoned his plan to bring the budget to a surplus by 2020 (from a deficit of more than 4% of GDP now) while the governor of the Bank of England all but promised interest rate cuts. The markets have yet to fully price in the possibility of a housing market crash.
But the third, and probably the most important reason why there is still a lot for markets to price in regarding Brexit is this: the vote has exposed a rift in British society that had so far remained hidden from the eyes of outsiders — or at least investors did not realise how deep this division was. I am talking about the xenophobia running through British society and its consequences on the economy.
The resurgence of racist attacks — hate crime jumped by 57% in a week following the referendum — is of course a worrying enough development on a social level. On an economic level, it is probably the most difficult to price in and the most likely to cause fundamental shifts in attitudes towards the UK and London.
Until not long ago, London enjoyed an enormous “Coolness” premium that other cities could only envy from afar: every young professional in Europe and perhaps even further, in Asia, the Middle East or Africa, dreamed of at least a scholarship or some period of work experience in London’s financial sector, law, media, or design and IT companies.
It is very possible that Brexit, if it signals a return to an era of xenophobia, intolerance and narrow-mindedness, will put an end to that. For the young professionals, it would not be a huge loss; they can always look towards other big cities for opportunities. For London, however, it would be tragic. The loss of “coolness” has not yet been priced in; if and when it is, it will cost London dearly.