The pound has recovered, the panic in bond markets has subsided and the FTSE has gained some ground.
The reaction to Kwasi Kwarteng’s mini-budget might have been overblown, but the decision to bring the Bureau of Budget Responsibility out of the cold was clearly the sensible decision. It has helped restore some peace and order, which was undoubtedly needed after a week of utter chaos.
However, some of the consequences will be permanent. The UK was perilously close to another catastrophic financial crisis that could have wiped out the retirement savings of millions. The Bank of England’s intervention was critical but may only be a temporary respite and a full investigation into what happened and whether it could happen again is urgently needed.
Elsewhere, the mortgage market, where a whopping 40 percent of products have disappeared, is unlikely to recover enough to stave off a housing crash.
At some point, Kwasi Kwarteng, too, will have to step back and assess the damage done to a financial sector already plagued by doubts about its reputation.
For a government seemingly determined to give the city back some of its appeal, the early signs will be worrying. At one point, UK markets had lost as much as £500bn under Liz Truss’ watch, a boon to those who have long sought to stay ahead of London in rankings of the world’s leading financial centers and a blow to their own Continuing the capital attempts to challenge New York and Singapore for supremacy.
Some of this week’s capital outflow will have been reversed, but only some – confidence in UK assets has taken a hit, adding to fears of the Square Mile’s demise.
Central to London’s reputation is its reputation as a place for international investors and companies to raise capital. But the UK stock market is shrinking fast.
UK equity outflows are nearing a record $18 billion this year, according to Bank of America data.
Meanwhile, UK companies such as Stagecoach, Biffa and Ted Baker, with a combined value of more than £40bn, have been sold.
This long-established trend is compounded by the fact that just £1.2bn was raised through IPOs in London in 2022, according to Bloomberg data. That’s just 14 percent of the European total, the lowest percentage since 2010.
This has quickly narrowed the gap between London and its closest rivals. With the FTSE-100 down 8% since early January and the FTSE-250 down 29%, the combined market capitalization of UK-listed companies has shrunk to within relative reach of main challenger Paris. With a combined value of $2.5 trillion, the gap between the pair is now $156 billion, close to a record low, Bloomberg calculates.
This will be music to Emmanuel Macron’s ears. Of all European leaders, it is France’s Brexit-hating president who would most like to steal the crown from London as Europe’s pre-eminent stock market.
Macron has done little to hide his true intentions, hosting a memorable post-referendum dinner for 140 multinational heads, including Goldman Sachs and Facebook, at the Palace of Versailles, urging them to “vote France.”
Of course, it doesn’t take much to trigger a turnaround in the fortunes of the Square Mile. The type of activity that determines the city’s prosperity has always been dependent on a variety of external factors.
Inbound deals can quickly reverse, floats can suddenly pick up again, and capital can easily flow back into stocks. Essentially, it boils down to market sentiment, but that’s the problem.
The government may never admit it, but Brexit and the ensuing and still raging post-trade problems continue to tarnish the UK’s image among international investors.
And while the UK financial services industry has so far proved sufficiently resilient to weather attempts from Paris, Frankfurt and Amsterdam to topple it, the concern is that the recent defeat in sterling and bond markets will prove crucial.
The characters are not big. Dealmakers predict a fresh influx of overseas bids in response to the weak pound. Despite a rebound from recent record lows, sterling is still down 18 percent year-to-date against the dollar, while the pipeline for new stock sales is weak.
The ministers’ response must be assertive. Lord Hill’s proposed changes to capital markets are welcome, but little more than tinkering with the fringes. Kwarteng has promised to go much further with a radical package of tax cuts and red tape known as Big Bang 2.
The public will lose little sleep over the fate of bankers and insurance brokers, but the financial services industry is much broader, employing 1.3 million people and the city generates £200bn a year and contributes £100bn in tax revenue. The Chancellor cannot afford to drop the ball again.
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