Market Reactions Still More Pain to Be Felt from Brexit

The initial market reactions to the Brexit vote have been relatively positive. But the real pain is yet to be felt, argues Peter Köhler of Handelsblatt.
Quelle: Bloomberg
Traders monitor financial data in London.

As the saying goes, when people have a bad feeling about something, the worst is yet to come. But players in the financial markets have been completely unwilling to succumb to this realization until now, at least when it comes to Brexit.

They talk themselves into believing that somehow the consequences of the British referendum will not be as bad as expected. Since last June, share prices on the London stock market – after a brief shock – have moved upward, and bad news about corporate relocations because of Brexit have mostly be ignored since then.

The only question is how long this can last. According to the latest survey on the issue, the answer is not much longer.

The poll, by consulting and auditing firm Ernst & Young, concludes that one in seven companies active in Great Britain now plans to relocate business units, compared to only one in 50 companies in continental Europe. And 40 percent of international investors view Germany as a top location for investments in Europe, while only 22 percent feel the same about Great Britain. The experts at Ernst & Young believe that Germany could benefit from its reputation as an anchor of stability, especially if populist tendencies continue to expand.

For this reason, investors should remain confident this year about equities from Germany and continental Europe. However, caution is increasingly advised with shares from Great Britain, because the island nation's stock market will not easily be able to disregard the shift in investments to other countries.

According to the EY study, more than one in three companies in Great Britain now believe that the country's attractiveness as a business location will decline in the next three years. This is the highest share since the survey was first conducted in 2004. Only 29 percent expect an improvement. By comparison, the share of positive expectations was 54 percent in 2015.

It appears that the worst is truly yet to come.

 

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