I have been working in the City since I left school at the age of 15 in 1968, so I think it’s fair to say I know a bit about finance. As the founder and chief executive of CMC Markets, an online trading company with a market cap of approximately £800m which entered the FTSE 250 this Monday, I also know a fair amount about traders.
During those years on the frontline of financial markets, I have lived through a lot of ups and downs. The 1987 global stock market collapse, sterling’s exit from the ERM in the early 1990s, the global economic recession in 2008, Lehman Brothers’s bankruptcy, the list is endless. And I have learned some important lessons, many of which are relevant to how markets and the UK economy could react to a decision by Britons to leave the EU.
First, the crowd is often wrong and taking the contrary stance can lead to great success. The louder the coordinated howls of doom from sources with questionable track records in forecasting – the credit agencies, the IMF, central banks, and politicians with vested interests – the more I’m convinced that leaving the EU is the best choice for the UK.
Second, obstacles that appear insurmountable at the time often end up just being speed bumps on the road to national success.
Third, markets and the economy are closely interrelated, so it’s important to look at big picture relationships not events in isolation.
With Leave gaining momentum in the polls, the threats and dire warnings have grown increasingly loud and separated from reality.
Greg Hands MP, speaking for Remain, recently stated that, “if the mere possibility that a British exit from the EU is damaging our economy so considerably, the consequences of actually leaving would be even more drastic.” What damage would that be? Retail sales for May were up 6 per cent over a year ago and April retail sales were revised up to 5.2 per cent growth from 4.3 per cent. Other UK data announced this month, from house prices and industrial production, to employment and private consumption, all point to a robust UK economy that is accelerating through the Brexit campaign.
Incredibly, Hands also suggested that a vote to leave could cause a stock market crash similar to Black Wednesday. Given other forecasts calling for sterling to crash should Vote Leave win, it’s clear that the Remain side just doesn’t understand the relationship between sterling and stocks.
Many of the companies in the FTSE 100 are multinationals with operations and listings around the world. A sharp decline in sterling would make these stocks cheap relative to other markets. This would encourage overseas investors to go bargain-hunting, thereby creating demand for UK stocks which could push the FTSE higher.
There has also been speculation that, following a vote to leave, capital and business would flee the UK for the EU or elsewhere, causing a recession and forcing the Bank of England to cut interest rates. A big drop in a currency, however, makes imports and international travel more expensive, while making exports cheaper and inbound tourism more attractive. In other words, a falling currency acts as economic stimulus just like an interest rate cut.
In any case, there’s good reason to suspect there wouldn’t be a big crash in the pound if Britain votes to leave. One, traders aren’t stupid. Markets constantly forecast and discount the future. With polls showing Leave taking the lead, sterling is still trading well above where it was in April let alone the lows in February when the campaign started. Clearly markets have already priced in the potential for a Brexit and traders aren’t as rattled by the prospect as some parties would suggest.
Second, even if some people with their heads still stuck in the sand end up surprised by a vote to leave and panic, if there is too much short-term instability, central banks and governments will step in to stabilise the situation. It is the duty of the Bank of England to act decisively to restore confidence should sterling come under fire. Leaders of the Bank of Japan and the Swiss National Bank have indicated they stand ready to intervene if needed should a pro-Brexit vote lead to instability. With so many parties watching the situation, ready to take action, the risk of a vote to leave sparking a big crisis declines despite the grand pronouncements from some quarters. The biggest risks lie where nobody is paying attention, not in the full glare of the global spotlight.
The Bank of England could and should intervene directly in the market to buy pounds and limit a potential decline. It could raise interest rates to defend the currency or take other measures. Governor Carney has been too busy warning about the risks of Brexit and too reluctant to outline what he would do to support the currency and economy should the UK vote to leave.
In a perfect example of the outdated thinking permeating in the Remain camp and its EU allies, George Osborne announced last week that, if Britons vote to leave the EU, he would introduce an emergency budget, raising taxes and slashing spending. Bringing in harsh austerity measures to meet some arbitrary budget target is exactly what the EU did to Greece and look at how badly that has turned out.
Threatening to cause a depression just because one doesn't get their way in an election is childish and irresponsible. As with the Bank of England, it is the responsibility and duty of the Cabinet to respect the will of the people and support the nation, not to threaten to punish us to help the cause of outside parties.
The UK is one of the five largest economies in the world and that won't change. We will not be isolated; many countries are still going to want to do business with us, particularly once the UK is free of the chains the EU is imposing on it. If anything, a UK free of the EU will look even more attractive to business and investment. That is what the purveyors of doom fear the most; a successful UK with a brighter future than our EU competitors.
It is time for the Bank of England to step forward and to lay out its position should the country vote to leave the EU. It is time for the Bank to stabilise and reassure the markets that it is behind our currency and our financial infrastructure, just like it has been for over 300 years. Otherwise, the Bank will be deemed to have gone political and aligned with the government, and 300 years of credibility would have vanished in a few months.