Opinion: Brexit threatens to become a fiasco — and investors are in denial – MarketWatch
What is this, a joke?
Great Britain today enters Brexit talks critical to its economic future without a plan, a stable team or a strong government. The country is in political turmoil, and the leader of the second-largest party, rising quickly in the polls, is considered an extremist even by his socialist colleagues. He is now talking openly about nationalizing private property, including homes, and if an election were held tomorrow he would probably win.
So how are investors in the world’s second-largest stock market taking all these risks into account?
Er… not at all, actually.
The London stock market is partying as if “God is in his heaven, and all is right with the world.” Investors can’t get enough of risky assets. The FTSE 250 index of midsized companies
which are more sensitive to shocks and more exposed to the domestic economy than their larger peers, has risen 10% this year and is about 1% off its record. It stands more than 80% higher than it was five years ago.
The larger FTSE 100
is more of an international index, as it is dominated by multinational megacaps, and is heavily exposed to mining and oil stocks. But it is up 5% so far this year and closed Monday just 0.3% from its alltime closing high.
A broad measure of British stocks tracked by FactSet, the market data company, puts them on 15 times the next 12 months’ estimated earnings, among the highest readings in the past 20 years. The same is true even for retail stocks, a sector very sensitive to the domestic economy.
Meanwhile British government bonds, known as gilts, are also shrugging off the news. Inflation is now running at 2.9% — but the yield, or effective interest rate, on 50-year gilts is just 1.5%.
And even the British pound is doing better than you might expect. It has fallen less than 2% against the U.S. dollar
from the level it enjoyed two months ago, when the outlook seemed rosy and stable.
In other words, investors are acting as if Conservative Prime Minister Theresa May won a stable majority in the general election, her party is united, she knows what she’s doing, Brexit is on track, and everything is A-OK.
Like I said: Is this a joke?
The most logical explanation is surely that decades of a bull market, combined with central bank interventions during every panic, have taught a whole generation of investors in Britain as well as in the U.S. to forget about “risk” entirely. The only way is up, surely? There are no bear markets, only “buying opportunities.” The idea that risky assets could lose you money — for good — belongs to the dim and dusty pages of history.
Well, good luck with that.
The Brexit talks could scarcely be more important. The European Union is central to Britain’s economy. It accounts for 44% of exports, but that’s only part of the story. London’s boom relies on entrepreneurial immigrants from across the European Union, who have turned it into the New York of Europe. Right now their status after Brexit has not even been guaranteed, and May apparently wants to use them effectively as hostages for the negotiations.
Britain has also benefited for two generations from being the main English-speaking country within the EU, the place where Americans, other English-speakers and continental Europeans could most easily come together to do business. London is the EU’s financial center. All of these things are at risk from a bad Brexit.
Theresa May, in the words of a former colleague, is now, politically, a “dead woman walking.”
The latest fiasco was that May reconstituted half her Brexit negotiating team just last week, in the wake of the general election. At least one firing appears to have been for remarkably petty personal reasons. So the team in Brussels today isn’t even fully up to speed on their brief.
The only mitigating factor is that there really isn’t a brief — and whatever is written their folders is liable to be junked soon anyway. May apparently wants to carry on with her plans for a “hard” Brexit, meaning limits on immigration and a loss of British access to the European single market.
But the collapse in her political position has put everything up for grabs. Party members are looking for a replacement. We don’t know who that will be, or what stance on the EU that person will take, or whether, indeed, there might be a cross-party team to negotiate Brexit instead.
A senior figure within the government privately told me that the chaotic situation behind closed doors was both “deeply depressing” and “embarrassing.”
May, in the words of a former colleague, is now, politically, a “dead woman walking.” Her inept public response to the terrible tower block fire in west London last week has sealed the fate already set for her by her disastrous general election campaign. Her public approval ratings are now minus 34. Two months ago she was on top of the world. Possibly not since Richard Nixon, in early 1973, has a political leader fallen so far, so fast, and so suddenly.
Senior Conservatives know she has to be replaced, and quickly, but there is no consensus figure waiting to step in. The bookies’ favorite, foreign secretary Boris Johnson, has plenty of enemies. And he is not seen as a safe pair of hands. Chief Brexit minister David Davis, a party veteran, is emerging as the “stop Boris” alternative.
It used to be said of the British army that “it always wins the last battle” — meaning it began every war badly but ended it triumphantly. Investors seem to be assuming that Brexit will go the same way. We shall see.