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One month after the referendum, are predictions of Brexit blight coming true?

Though the Leave vote hit share values hard, many have recovered. But other sectors of the economy will be counting the cost for years

The overall impact of the historic referendum that saw the UK unexpectedly vote to leave the European Union has so far, in the space of a month, been less severe than some of the more apocalyptic warnings had suggested. But there have been winners and losers across the economy.

The pound

Sterling went on a rollercoaster ride on referendum night, ending up down 8% against the dollar as the results confirmed a victory for the Leave camp. Since then, its decline has continued and the pound is now at levels not seen since 1985, having lost about 12% against the US currency. Compared with the euro, the pound has fallen by 9% since the vote and is at a three-year low making holidays in euroland more expensive.

The decline comes as investors worry about weakness in the UK economy and the prospect of interest rate cuts to boost demand. This month the Bank of England left rates on hold but said most members of its monetary policy committee expected a cut in August if the economy did not improve.

The weak pound is a boon to exporters but will make imported goods more expensive. On Thursday, Unilever the business behind brands including Dove, Flora, Bertolli, Hellmans and Persil became the first major food and consumer goods company to warn that companies were likely to pass on increased costs to customers.

Stock markets

Markets were caught by surprise by the Leave result and a record $2tn was wiped off the value of global shares. But since then, there has been something of a recovery, particularly for the FTSE 100, which has regained all lost ground and more, and is currently at 11-month highs. However, the leading UK index is chock-full of companies with international operations, which are less exposed to any slump in the UK economy, and which earn in dollars, thus gaining from the new lower exchange rate.

The weak pound has also raised the prospect of UK-listed companies being snapped up by foreign rivals because suddenly they look cheap. Just last week chip designer ARM agreed to be taken over by Japans SoftBank for 24bn, while South African retailer Steinhoff has agreed to buy Poundland. Analysts believe more deals will follow.

Markets have also been lifted by bargain hunters who believed valuations had fallen too far, as well as by the quick resolution to the political crisis threatening to engulf the government following Theresa Mays appointment as prime minister.

However, the mid-cap FTSE 250, which is more exposed to the UK economy than the 100 index, has yet to reach the level it was sitting at before the referendum result, despite recovering more than 13% from its lows. It is now down 2% from its pre-Brexit level.

Housing market

There has been a spate of profit warnings from estate agents, and many are making gloomy forecasts for the rest of the year. Agents in some upmarket parts of London have reported a bounce in interest from overseas buyers keen to take advantage of weak sterling, but for the mainstream market there are signs both interest and price growth have cooled.

On Friday, LSL, Britains second-biggest estate agent group owner of Your Move and Marsh & Parsons among others said business had slowed since the vote and warned that its annual profits would be significantly lower than anticipated. London-focused Foxtons issued a similar warning in late June.

Forecasts for the rest of the year are for falling interest from buyers and price drops, particularly in the most expensive parts of the market. French bank Socit Gnrale said last week that a price correction of even 40-50% in the most expensive London boroughs could be possible.

The Royal Institution of Chartered Surveyors (Rics) says its members expect sales to slump over the summer, because buyer inquiries fell significantly in June. Ricss findings were cited by the Bank of England when it announced that it was revising down its forecast for price rises.

Housebuilders

Shares in housebuilders lost around 40% of their value in the immediate aftermath of the Brexit vote, with investors worried that an economic slowdown in the UK would hit their business, despite the country seeing record low interest rates.

There has been some recovery since then, but the companies have failed to regain all their losses. Barratt Developments, Britains biggest housebuilder, is still down around 28%, and it has said that it may build fewer homes because of the current uncertainty.

Even before the vote, upmarket rival Berkeley had warned in June of a 20% drop in reservations of new homes.

Barratt
Barratts share price is down 28%. Photograph: Bloomberg via Getty Images

Commercial property

The commercial property market was already stalling in the months running up to the referendum as investors put plans on hold to await the result. The UKs decision to leave the EU has not encouraged them back.

Rics said last week that there had been a significant drop in confidence and demand among investors and tenants since the vote. Both rent and capital value expectations are now in negative territory, it reported, adding that office and retail properties have been hardest hit.

Funds invested in commercial property were forced to close their doors for a while, as panicked savers tried to withdraw their cash. Those barring withdrawals included funds run by Standard Life, M&G Investments and Aviva Investors. Last week, they started to reopen for business, but some investors who want to get their money out will take a hit. Aberdeen Asset Management, for example, is adjusting payments downwards by 7%.

Banks

The banking sector has been hard hit by the Brexit fallout, thanks to a combination of low interest rates, worries about future access to European financial markets and the prospect of a general downturn.

With expectations of another rate cut in August, the banks are braced for more strain on their stretched balance sheets, at the same time as the economy is slowing and the risk of bad debts is increasing.

Moreover, so-called passporting arrangements, under which banks can sell financial products throughout Europe even though the UK is not part of the single currency, could come under threat after Brexit.

Banks most exposed to the UK market have been hardest hit, with Lloyds Banking Group and Royal Bank of Scotland down 25% and challenger bank Virgin Money falling 35%.

Profit warnings

Estate agents have been the only businesses to issue profit warnings following the Brexit vote. However, British Airways owner International Airlines Group was quick off the mark to say the uncertainty would hit demand, closely following by easyJet. Last week, the budget airline added that the fall in the pound had cost it 40m.

Other travel companies are also suffering as, along with increased concerns about terror attacks, they face the prospect of UK holidaymakers ditching more expensive overseas trips and staying at home.

But executives at Heathrow airport said on Friday that the Leave vote had been good for business, with the falling pound encouraging international visitors to spend more in its shops, as well as making it easier to raise money from foreign investors.

FIRST SIGNS OF ECONOMIC IMPACT

The first real sign that Brexit is having an impact on the economy emerged last Friday, with a Markit survey showing business activity in services and manufacturing shrinking in July at its fastest rate since the global financial crisis in 2009. The data suggested that UK GDP could contract by 0.4% in the third quarter, according to Markit.

Until then, the data had been equivocal. The International Monetary Fund, which before the referendum had warned of possible recession if the Leave campaign won, cut its forecast for UK growth in 2017 by 0.9% points to 1.3% from its April estimate. But that is still similar to its forecasts for Germany and France.

A report from the Bank of Englands regional agents last week showed that a majority of firms were not planning to mothball investment or change their hiring plans.

The latest job figures looked upbeat: showing unemployment at its lowest level for more than a decade, with 31.7 million people in work in the three months to the end of May 176,000 more than for the three months to February 2016.

On the high street, however, the volume of retail sales fell by 0.9% between May and June. This compared to a rise of the same amount in the previous three months, and showed the effect of falling consumer confidence in the run-up to and immediate aftermath of the EU vote.

This was backed up by a survey from the British Retail Consortium and KPMG showing retail sales in the three months before the vote at their weakest for seven years, while market research group GfK recorded the biggest slide in consumer confidence for 21 years in a one-off poll following the referendum.

Inflation is on the rise, with official figures showing that dearer air fares and driving costs helped to push the consumer price index up by 0.5% in the year ending in June, up from 0.3% previously.

With higher prices on the way after the Brexit vote, inflation could breach its 2% target during 2017.

Read more: https://www.theguardian.com/business/2016/jul/23/brexit-one-month-after-referendum-blight-predictions


UK loses triple-A credit rating after Brexit vote

Standard & Poors issues downgrade and pound hits 31-year low despite chancellors attempts to soothe markets

The UK has been stripped of its last AAA rating as credit agency Standard & Poors warned of the economic, fiscal and constitutional risks the country now faces as a result of the EU referendum result.

The two-notch downgrade came with a warning that S&P could slash its rating again. It described the result of the vote as a seminal event that would lead to a less predictable stable and effective policy framework in the UK.

The agency added that the vote to remain in Scotland and Northern Ireland creates wider constitutional issues for the country as a whole.

S&P was the last of the big three ratings agencies to have a blue-chip rating on the UKs credit-worthiness. Moodys, which stripped the UK of its top notch rating amid the austerity cuts of 2013, said last week it might further cut its view of the UK.

Rating agency moves have the potential to make it more expensive for the government to borrow.

The S&P move came after another torrid day on the financial markets. The pound hit fresh 31-year lows and 40bn was wiped off the value of the UKs biggest companies on Monday, despite efforts by George Osborne to quell investors concerns about the economic and political ramifications of the Brexit vote.

After three days of silence, the chancellor made a statement on Monday morning to try to calm the markets. However, sterling remained under sustained pressure on the foreign exchange markets as economists slashed their forecasts for UK economic growth. Wall Street was also weaker while continental bourses sold off sharply after Fridays record $2tn of losses on global stock markets.

Expectations are mounting that the Bank of England will cut interest rates possibly to zero from their historic low 0.5% to stimulate the economy, and yields on government bonds fell below 1% for the first time, which could spell cheaper mortgage rates.

In a live broadcast just after 7am, as dealers in London braced for another day of turmoil, Osborne insisted: Our economy is about as strong as it could be to confront the challenge our country now faces.

But moderate losses on the FTSE 100quickly deepened and at one point sterling was down 3.5% against the dollar, at $1.3122, its lowest level since 1985. Against the euro, the pound was down 2.4% at 1.19.

Speaking at the World Economic Forum in China, Nouriel Roubini, economist at New York University, described Brexit as a major significant financial shock that would create a whole bunch of economic, financial, political and also geopolitical uncertainties.

By the end of trading, the FTSE 100 index was down 2.6%, or 156.5 points, and below 6,000. The FTSE 250, the next tier of companies and more closely tied to the UK economy, was down 7%, coming on top of a 7% fall on Friday.

Its been another dramatic day of trading on the UK stock market, said Laith Khalaf, senior analyst at the financial firm Hargreaves Lansdown.

Companies likely to be impacted by a Brexit-induced recession were hit hard. In two days, about 40bn has been wiped off the value of banking stocks and 8bn off housebuilders. At one point, shares in the bailed-out Royal Bank of Scotland plunged 25%, while housebuilders such as Persimmon and Taylor Wimpey have lost more than 40% in just two trading days.

Michael Hewson, chief market analyst at CMC Markets, said while Osbornes statement had been measured his comments were unable to prevent the feeling that UK politics remains in a state of paralysis, with no clear contingencies in place to deal with the fallout of a leave vote.

The biggest faller in the FTSE 100 was short-haul airline easyjet, which plunged by 22% after warning that wary consumers would now rethink their travel plans. Exchange rate movements, the carrier added, would add 25m to costs.

Another profit warning came from the London-focused estate agent Foxtons. Its shares dived 25% after it said Brexit would hit sales for the rest of the year. Shares in so-called challenger banks such as Virgin Money were also pummelled.

Osborne spoke after it emerged that the Bank of England governor, Mark Carney, had cancelled a trip to Portugal to remain in the UK to oversee any response from Threadneedle Street.

The Banks financial policy committee, set in the aftermath of the financial crisis to look for threats to stability, will meet on Tuesday, when the Bank of England will again offer emergency loans to banks as part of its Brexit planning.

The fallout from the vote is being felt around the world. Italys main index fell 4%, extending Fridays record losses of 12.5%. In Germany and France there were losses of 3%. At the time of the London close, on Wall Street the main share indices were all down more than 1%.

The chancellor may have taken some comfort from the fall in yields on 10-year government bonds. Yields on these gilts, which move inversely to prices, fell below 1% for the first time. This fall in gilt yields will keep government borrowing costs down and lead to lower mortgage rates. However, they also mean pension companies have started cutting the amount paid to the newly retired.

Osborne refused to repeat his pre-vote warning of a Brexit recession, saying only that the economy would face adjustments. But analysts started to cut their forecasts for UK growth. Goldman Sachs, forecasts just 0.2% growth in 2017, down from 2% predicted previously.

The consultancy Oxford Economics said interest rates could be slashed to 0% within weeks. Morgan Stanley analysts said European and UK stocks would fall up to 10% over the coming months and sterling would fall to between $1.25 and $1.30.

Much of the markets focus has been on the pound, particularly after the speculator George Soros, who made $1bn when sterling fell out of the exchange rate mechanism in 1992, had warned of a black Friday in the event of Brexit. His spokesman stressed that he had not bet against the pound last week.

George Soros did not speculate against sterling while he was arguing for Britain to remain in the European Union, the spokesman told Reuters. However, because of his generally bearish outlook on world markets, Mr Soros did profit from other investments

Read more: https://www.theguardian.com/business/2016/jun/27/property-and-financial-shares-slide-as-referendum-fallout-hits-stock-markets


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