You fall asleep in front of the television on February 22, 2016, just as images of Cameron are playing on the news, surprisingly announcing that there was nothing they could do with Merkel and therefore, as promised, there will be a vote on June 23 whether to stay or not in the European Union. You wake up today and, as a compulsive trader, you run to look at the prices of the English part of your portfolio.
During your nap the London Stock Exchange rose by 27.5 percent. Breathe a sigh of relief, Brexit has been rejected. London has also advanced in line with the other European stock exchanges. Milan rose by 27.4 and Frankfurt by 30.5. All lined up like toy soldiers, all still together.
Even your XNUMX-year gilts confirm this. UK Treasury Bund spread was 122 points when you fell asleep and is now down to 97 points. Optimal. Only the pound weakened, by 10 percent against the euro and 5 against the dollar. It took, think, the United Kingdom was living well beyond its means with an overvalued pound and had reached a current account deficit of 6%. Sure, there had never been a problem financing it, with all those rich Russians and Arabs buying up buildings in London and all those multinationals opening factories and offices in flexible and de-unionized England and then exported to the rest of the rigid European Union. And anyway all that deficit was not healthy and made the UK too dependent on foreign countries.
Look up the IMF's annual report on the UK and find that the devaluation has been successful and that the current account deficit has narrowed from 6 to a more manageable 3.8. The weaker pound drove up inflation, but only for a few months. The estimate for this year is 2.6, less than the US CPI. In the meantime, public finances (if recalculated with the cyclical adjustment used in the Eurozone) have reached the perfection of a balanced budget. Of course, think, since they didn't have the Brexit problem, they didn't need to support the economy with public spending.
However, you feel a little disappointed when you look at the growth estimates, which have always been good, but less than what was expected two years ago. The IMF believes that the potential for the UK will be in the next 1.5 years. It is the same level as in the Eurozone, a sign that convergence has now been achieved and that from now on we will all proceed together.
Of the fact that the United Kingdom, having avoided Brexit, is at peace with itself, you also draw confirmation from theweakening of separatist tendencies in Scotland and Northern Ireland, fell to 40 per cent in Scotland and an all-time low of 21 in Ulster. But even more interesting is that the United Kingdom is today the only European country without anti-system political forces and in which, with the disappearance of UKIP and the one-round majority, there is still a practically perfect bipartisanship. Free to express themselves in referendums on issues close to their hearts, the British need not vent their frustration with the elites by voting for radical parties and movements.
With all this good news, your amazement is evidently great when you learn that the referendum was won by the Leave, those who were supposed to bring down the stock market and GDP, set in motion the final disintegration of the kingdom and retreat to a Little England dominated by Ukip . It didn't happen that way, but not even seen, for now, the immediate benefits that the Leave had promised their supporters.
Brexit has always had two ideological souls, the first sovereignist and the second globalist. The popular vote was sovereignist, subjectively irritated against immigration and objectively against globalization. It is a soul that has always been present in British history, just think of the Little Englanders who in the mid-nineteenth century opposed the expansion of the empire, considered costly and useless. Globalists, in the Leave world, were instead the elites, seduced by the idea of Great Britain as an oceanic power, which must not waste time with a stagnant and oppressive Europe and must instead launch itself towards the growing world, China, America and the emerging ones. As in the times of the Tudors, when Henry VIII and Elizabeth made the first Brexit, breaking with the Church of Rome and with the Empire and projecting themselves with their privateer and regular sailing ships into the new worlds.
What the United Kingdom now risks is not to make any progress in either direction, i.e. not being able to detach itself sovereignly from Europe (becoming in fact even more dominated by it in exchange for a false independence) nor to boldly project itself towards the world. The result is a frustrating limbo, which risks continuing for many more years (the formal exit will take place next year, but it won't change much because a transitional period will immediately open until December 31, 2020, which will probably be extended further). In this limbo the kingdom will suffer from a serious identity crisis, it will be neither fish nor fowl, just as Theresa May has no identity, capable only of floating in the magma of bad moods of the country and to negotiate downwards with a European Union which, beaten by Trump, in turn seeks to beat as much as possible the rebel province. And above all hovers Corbyn the socialist, who with his cumbersome and formidable presence forces the establishment to take refuge in immobilism and to prolong as long as possible a legislature born weak and confused.
For this reason, without being particularly pessimistic, it is difficult to be positive about the kingdom's assets. The real estate will not go into serious crisis because England needs houses, but we will have to forget the increases of recent years, driven by a demand for luxury immigrants that will be weaker for a few years. The pound will still have to weaken, although not by much. Exporters will therefore be favored on the stock market, compatibly with European and American duties being raised.
The UK will be left with two major charters. One is flexibility, which allowed Osborne to cut half a million state loans in 2014 (immediately reabsorbed by the private sector) without strikes and social tragedies and the Bank of England, after Brexit, to intervene nimbly and aggressively to cushion the shock. This flexibility, already in the second half of the next decade, will make up for lost time. The second card will be that of a safe haven outside an increasingly agitated European Union and in turn unable to find a way.
Coming to the short term, in two weeks we will have second quarter earnings data, which will be good and which will fall at a stage where America is growing even faster than 3 percent. As for tariffs, American pressure will ease after the November elections. Next year will be more difficult for the stock markets, but for 2018 it is not so risky to think, after the correction underway, of a last leg of the upside later in the year.
