Beware of the Brexit Boom's Aftermath

Saturday 5th February 2022

Has the UK’s economy imploded in a firework of Brexit carnage yet? You’d certainly expect so given what politicians, economists, bankers, and lawyers warned about…

Saturday, 5 February 2022 — Komatsu, Japan

By Nick Hubble

Editor, The Daily Reckoning Australia

Brexit Britain is booming

Should Aussies invest in UK stocks?

The EU might go boom too…

Dear Reader,

Has the UK’s economy imploded in a firework of Brexit carnage yet? You’d certainly expect so given what politicians, economists, bankers, and lawyers warned about.

Indeed, the UK’s FTSE 100 Index has been a notable underperformer for quite a few years now.

But what if this was just a buying opportunity for Aussie investors who can see through the…misguided…claims about Brexit?

You see, news of Brexit Britain’s demise has been…well, there hasn’t been any. The news has been impressively good instead. Project Fear, as Brexit doom-mongers are now known in the UK, was utterly humiliated.

I believe this gives those investors willing to see past the spin an opportunity to invest in undervalued stocks. Let’s see if you agree…

And let’s start with the aggregates. The IMF forecasts the UK economy to be the fastest growing in the G7 for the second year in a row.

The UK looks set to be the first major economy to escape the clutches of COVID restrictions.

The Bank of England was the first major central bank to tighten monetary policy — a sign of strength.

It took less than two years from the referendum for the pound to recover against the US dollar and it’s up since the official Brexit date too.

Heck, these Brexit days, even the car industry in Britain is looking up. Bentley just unveiled a £2.5 billion investment to build its first fully electric car, securing 4,000 jobs.

Nissan’s CEO, who had been one of the most quoted Brexit doom-mongers around, recently announced an increased investment in production instead:

‘Europe will take the lead on electrification around the world for Nissan…

‘In Europe, Sunderland is the one which will take the lead towards electrification.’

Contrast that with Tesla, which couldn’t be bribed enough to put up with German red tape for its Gigafactory. I wonder if Elon Musk is a Brexiteer now?

Britain’s biotech sector may be in for a ‘golden age’ according to corporate leaders in the sector after figures from the BioIndustry Association (BIA) showed biotech and life sciences companies secured £4.5 billion in public and private fundraisings in 2021 — a 60% increase on 2020.

Part of this boom may be because companies would be mad to base themselves in the EU after how vaccine producers were treated there during the pandemic dramas…

One of the most important Brexit issues was how the City of London would fare. That’s a reference to the financial centre side of things, not the literal place.

And there’s no better example of how Project Fear was proven wrong.

While talk of an exodus of 232,000 finance jobs was remarkable enough, this doom-mongering was my favourite, in The Guardian:

‘City firms plan to move 10,500 jobs out of the UK on “day one” of Brexit, with Dublin and Frankfurt the financial centres most likely to benefit from the UK’s departure from the EU.

‘The job tracker compiled by the accountants EY, which counts job announcements to the end of November, found that the number of roles likely to be affected had fallen from estimates of 12,500 a year ago.’

By the middle of 2021, the European Banking Authority had the number of bankers that left London for the rest of Europe at 95…

No, not 95,000. Just 95.

In fact, these days, you can read stories about how the City is booming…

The Telegraph reports that:

‘London has retained its crown as the world’s top destination for financial and professional services…

‘The Square Mile outperformed other major financial hubs, including New York, Singapore and Paris, as firms quickly adapted to Brexit.’

Using 95 metrics, the report:

‘Found that the City had an “unmatched international financial reach”, while it also excelled as a hub for tech and innovation and its share of headquarters of Fortune Global 500 companies rose by a third over the past year. It also remained Europe’s leading destination for investment in financial services and was the world’s leading foreign exchange trading centre.’

Not bad, eh?

Especially given Project Fear’s claims. After the Brexit referendum in 2016, a KPMG survey of 1,300 CEOs found 76% were looking to relocate, and 29% felt forced to by Brexit.

Meanwhile, one of the largest firms in Europe, Shell, moved its HQ from Amsterdam to the UK…

Also in The Telegraph was news that the doom-mongers’ former favourite statistic had staged a rather extreme turnaround:

‘EY report finds nine in ten major financial services firms plan to establish or boost operations in the Square Mile.

‘The survey found that investor confidence in the UK financial services sector was at an all-time high, having risen significantly in recent months as pandemic restrictions recede and Brexit fears fail to materialise.’

The Brexit fears failed to materialise and so the bankers stayed? Heck, the Brexit fears were that they would leave in the first place…

The Express pointed out how this optimism translates to boots on the ground and investment in local real estate:

‘Multinational investment banking giant Citi launched a £100million overhaul of its 42-floor Canary Wharf tower, despite foreign banks having been expected to leave London as a result of Brexit. James Bardrick, head of UK at Citi, said the investment showed the bank's commitment to London for “25 years and beyond”.’

Since Brexit, Citi has added more than 1,000 jobs in London, bringing it up to 9,000 staff. I wonder how many of them are EU citizens.

So what changed? Why didn’t London’s financial district implode in an exodus of staff, money, and companies?

It turns out that Europe needs access to the City to sort out its own rather fragile finances, just as much as vice versa. That’s why the EU has proposed prolonging a temporary waiver for European banks and fund managers to use UK clearing houses until June 2025, and the same for euro derivative clearing rights.

In fact, as The Telegraph reported back in September:

‘Financial service exports to the European Union rose in the months after Britain left the EU despite warnings that the City would be hit by a collapse in trade, official figures show.’

The comparison was of 2021 to 2019, so no pandemic distortions here.

So not only was there no plunge in financial services exports, but there was also an increase!

Yes, ‘the figures undermine claims by chief executives and politicians that Brexit would devastate the Square Mile’s ability to trade with the Continent,’ but here’s the interesting bit:

‘European firms’ appear to have suffered most of the damage [from Brexit]. Financial services exports from the EU to the UK slumped by more than a third, predominantly hitting companies in Ireland, France and the Netherlands.’

Yikes, European finance firms had the Brexit crisis instead?

And all this is for the industry that was not included in the Brexit trade deal, a concern that caused much wailing and gnashing of teeth at the time.

But that’s just the financial district. The UK’s stock market index turned from an underperformer to an outperformer recently, with its oil and gas firms helping to give a boost while the US’s tech stocks and Europe’s manufacturing struggle.

According to Schroders, the UK is home to a far higher percentage of 10-baggers than even the US, meaning that the share price rose more than 1,000%.

If you ask me, the UK is booming. And that boom is set to continue, depending on how the self-governing nation decides to make the most of its new-found powers.

But I’m not entirely sure this is good news for Aussie investors. Because it poses a series of extreme financial risks too.

You see, Europeans are waking up to the realisation that Brexit is benefitting the UK. That having your own economic policy, exchange rate, and democratically-elected government is a good idea.

Frexit (France exit) campaigner Francois Asselineau really let ‘em have it in a video posted online:

‘Macron even said that he would have the red carpet ready for the hundreds of thousands of people working in the city of London who would cross the Channel to settle and take refuge here in France.

‘What has happened one year after Brexit?

‘The UK has 4.5 percent unemployment, half the amount of France.

‘No, but wait. Did I dream it or not? We were told that Brexit would be the apocalypse, but it is not the apocalypse! The UK's growth is higher than our growth.

‘Google, Boeing and Shell have transferred their headquarters to London.

‘The City has regained its position as Europe's leading financial centre and the French know very well that migrants want to enter the UK.

‘We were told that in international matters, the UK would isolate itself and not at all.

‘With the United States and Australia it made an alliance and this is the origin of us losing the contract for the submarines in Australia.’

Project Fear, meanwhile, hasn’t changed its tune. The analysis from Grégory Claeys, a researcher at the think tank Bruegel, may sound familiar to you:

‘Frexit would lead to a freezing of financial flows and bring the global financial system to a cardiac arrest.

‘The failure of Lehman Brothers could look like a small shock in comparison, and even that had major real economic implication.’

Yes, yes, I’m sure it would, just as it would for Brexit.

Except, Bruegel’s researcher might actually be right. The desire to leave the euro really could trigger a major financial crisis because it would likely risk a sovereign debt crisis too.

And so, I think we should be weary of celebrating Brexit as a success story. It might become a little too popular…

Regards,

Nickolai Hubble,

Editor, The Daily Reckoning Australia Weekend

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