Reverberations from the Brexit were less than three weeks old when BlackRock, the world’s largest money manager, offered some grim news for anyone thinking about retirement. Its CoRI (cost of retirement income) index, a metric designed to tell individuals how much retirement income their savings can buy, had climbed almost 10% in only 15 days since the United Kingdom voted to leave the European Union.
A reasonable person might be forgiven for asking how one distant event could influence so basic a need for hundreds of millions of American adults so quickly. In today’s high-frequency financial markets, Brexit triggered a flight to quality that first drove up the prices of U.S. Treasury bonds, prompting other American bonds and equities to follow suit.
The uncertainty surrounding Brexit isn’t going away anytime soon. Today’s world is more interconnected than most people think. Divorces have been called off before, and Greece, where 60% of the people voted to leave the EU last year, still has yet to initiate the process. The only nation to actually go through with withdrawal was Greenland, which decided it didn’t want to share its fisheries with Europe.
A range of astute observers, like JPMorgan Chase CEO Jamie Dimon and Gluskin Sheff’s chief market strategist David Rosenberg, initially expressed serious doubts that the separation would ever happen. Dimon subsequently indicated his bank was preparing for a “range of outcomes.” Germany’s finance minister Wolfgang Schauble, who actually wields some power in the ultimate outcome, suggested in the days immediately after the vote that the EU should consider two levels of membership, one for full members and another for associate members.
Whatever happens, the United Kingdom, Europe’s second-largest and healthiest economy, may well emerge in fine condition, although many expect it to enter a recession in the next year. Great Britain’s likely exit will be cushioned partially by its earlier refusal to join the euro, but hedge funds are betting the British pound will fall further. At the least, a weak currency should boost its exports and tourism businesses.
Brexit itself may not be such a watershed event, but the massive discontent it symbolizes in the developed world certainly is. The same forces that propelled the candidacies of Donald Trump and Bernie Sanders in America are more pervasive in Europe, where most nations have upstart political parties challenging the status quo.
What amazed me as a visitor to England in late June was the degree to which the Brexit debate exposed the fault lines in normally civil, homogeneous British society. Arguments pitted the north against the south, affluent urbanites against the countryside, Scots versus Brits, young against old and working class Brits against immigrants, several of whom reported hate crimes in the days after the vote. On several occasions, senior citizens who voted overwhelmingly to leave complained of confrontations with millennials, predominantly EU remain supporters, who asked their elders, “Why can’t you just die?” But just as in America, older voters turned out in droves while less than 40% of those under 30 years old voted.
The nation’s new prime minister, Theresa May, addressed these divisions, taking radical positions for a leader of the Conservative party. She lashed out against executive pay, scarce opportunities for working class whites, the criminal justice system’s treatment of blacks, and a general consensus that the system favored the very affluent.
Her message was a far cry from Margaret Thatcher’s union-bashing embrace of raw red-meat capitalism that dominated the party a quarter century ago and split the country down the middle. If Brexit happens, its economic reality should help May curb inequality, as London is expected to lose high-paying financial jobs to Frankfurt, Paris and Dublin. Meanwhile, the plunging pound should help manufacturing in England’s rust belt cities like Manchester and Birmingham.
A larger question is what happens to the rest of Europe while the soap opera between London and Brussels unfolds. Several years of history were compressed into a few weeks, but going forward events will play out in slow motion unless there is major downside surprise, according to Krishna Memani, chief investment offer of OppenheimerFunds.