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27 June 2016updated 12 Oct 2023 10:41am

Investors are panicked by Brexit – here’s why we should care

Look closely at the markets, they tell a story. 

By Julia Rampen

If markets diving was a sport, this is the Olympics. Since it became clear Britain was heading for Brexit, the FTSE 100 and FTSE 250 have been plunging headfirst into the abyss, coming up for air and then plunging again. 

On Monday morning, RBS temporarily suspended trading in its shares after the value plunged 14%, and Barclays did similar after a 10% hit to the price. 

The FTSE 100 was down 1.2% overall, while the FTSE 250, which is more exposed to domestic markets and hence a better bellweather of the domestic economy, was down nearly 4%. 

Meanwhile, the pound could buy $1.33 on Monday, compared to $1.46 a week before. 

It’s the kind of day that makes financial journalists giddy with excitement and sends normally sedate investment houses into meltdown. 

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But how far should ordinary voters actually care? 

After all, the general public has not felt particularly sympathetic to bankers since their reckless behaviour caused a financial crisis that threatened the very fabric of society in 2008. 

The financial services industry disproportionately benefits London – the kind of metropolitan elite society that Leave voters resolutely protested against. 

And stock markets are famously nervy. Earlier in the year, unease about China triggered a “Black Monday” for FTSE traders but made little dent in ordinary workers’ lives. 

Despite all these reservations, though, this time voters should keep an eye on market moves. This is what they appears to be telling us:

1. This is a domestic crisis

Many of the biggest companies based in the UK are actually international corporations, with customers all over the world. Shares in Unilever, for example, a company that does more than half of its business in emerging markets like India, are up. 

The real damage is in the companies with a lot of exposure to UK customers. For example, shares in the housebuilder Persimmon were down 12.5% on Monday morning, while EasyJet was down 18.4%. 

The FTSE 250, which has more domestically-exposed companies, was down 5% on Monday morning, compared to the FTSE 100’s much milder 1.63% dip. 

All in all, this suggests investors are nervous about the impact the uncertainty will have on the domestic economy, whether that means less shoppers on the high street or less first-time buyers able to purchase homes. 

2. Banks are still a weak spot

We may love to hate banks, but for most of us they perform essential services, like providing a safe place to hold savings, dispense cash and provide credit. Underpinning their ability to do this is, of course, their own financial stability. Since the financial crisis, building a robust banking system has been a major project of the Government and Bank of England. 

Banks are also an important chunk of the economy – in 2014, financial services added £126.9billion in gross value to the UK economy. Banks also current benefit from an EU passport which allows them easy access to the European markets.

As the suspension of RBS and Barclays shares show, though, investors are clearly feeling nervous. Virgin Money shares – the rebranded Northern Rock – were down 18.9%, while those in Lloyds Banking Group had tumbled 9.4%. 

This doesn’t mean anyone has to panic about their savings, but it does suggest that UK banks are hitting a rough patch. This in turn could mean a dent in economic growth, banks moving to Europe, or in the worst-case scenario it could lead to liquidity problems and taxpayer support. 

3. Investors still trust UK institutions

Government bonds, known as gilts, are generally seen as a safe investment. It effectively means you lend to the Government via the Bank of England, in return for a certain interest payment, known as a yield. Bonds from creditworthy states, such as German bunds, pay lower yields, whereas less creditworthy states generally pay higher ones in return for the investor taking more risk. 

On Monday, 10-year gilt yields fell below 1% for the first time ever in their history. In other words, investors may be very jumpy about the stock market, but they still regard gilts over a longterm as a safe investment.

It’s generally obvious that investors see governments as a safe haven, but given the spasms the UK is now going through, it’s worth noting. 

The days ahead

There will be less dramatic days ahead. But some of the concerns investors feel will be more long-lasting than others. If, for example, UK financial institutions decide to move headquarters to Frankfurt or Dublin, this could tear a hole out of our current economic set up, for better or worse. It would mean job losses, particularly in London and Edinburgh. 

If house prices do stagnate, as investors seem to fear, it could make buying a property more affordable. The flipside of this is we may see an echo of the years after 2008, when house prices are low but banks were unwilling to lend to anyone but the most creditworthy borrowers.

As for the investors, there will be winners and losers. Some who buy shares now may find that once the dust settles, confidence in returns and they make a profit. But that’s little comfort to anyone on the rough end of a redundancy round, or negative equity. 

 

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