The global economy is like a child. It uses events, such as Brexit, as a play toy. However, just like a child, the global economy quickly gets tired of playing with the same thing over and over again. Just three days after Brexit, markets are already acting like it didn’t even happen.
Granted, global markets are still down from the beating they received. Yet slowly but surely, prices are climbing back to former levels. It really didn’t take long for the market to quickly move on from Brexit. And now it turns its head to other uncertainties.
One of these is the US presidential election. As much as some people don’t like him, Donald Trump is still in the race. The election will be held in November and could have a huge impact on all markets. And I do mean all; including equities, bonds, currencies and other assets.
But judging by what we’ve seen from Brexit so far, will the election really shock the market? The markets made a huge shift as soon as the Brexit result was verified. However, just three days out of the woods and we are slowing climbing back up.
This, of course, could be due to a lot of bargain hunters diving into the market. We might be in for another drop. But we can only go on the information we have right now. And the information is saying ‘quick recovery’.
Right now bargain hunters and value investors are rubbing their hands. But there are also other overseas investors taking advantage of the Brexit situation.
Foreign consumers buy up cheap British goods
As soon as the ‘out’ decision became clear, the British pound dropped 11.8%. At its low, each British pound was exchanging hands for US$1.323. The British pound hadn’t fallen that low since 1985. But as the British pound dropped, British goods and exports became attractive to foreign countries.
This created a flurry of buying from overseas consumers — mainly Chinese consumers. They were eager to snatch up Burberry trench coats, Harrods Stilton and Liberty scarves on the cheap. On the international travel booking app Ctrip.com, searches for ‘UK holiday’ skyrocketed.
Realistically, a blow to the pound is exactly what many UK luxury companies needed. Chinese consumers are the biggest buyers of high-end goods and make most of their purchases overseas. They made up to 270,000 trips to the UK last year, which is up 46%. And according to British Airways owner IAG, the weaker pound will boost tourist flows to the UK.
And when you think about it, leaving the EU was a great move to improve Britain. Not just socially, but economically as well.
The cost savings of going it your own way
In the future Britain will be no longer be part of the EU. When this does happen, Britain will end up saving on membership fees. That’s right; it actually costs money to be part of the EU. The membership fee last year cost Britain around ₤13 billion. However, they also received around ₤4.5 billion worth of spending, bringing their net contribution to ₤8.5 billion. Good thing there are no cancellation fees…
And while Britain benefits from free trade within the EU, this privilege will not be revoked until Britain actually leaves the EU. This might not happen for a number of years still. Therefore, Britain is benefiting from free trade with Europe at the moment.
Also advantageous to Britain’s trade is their devaluated pound. British exports are now more attractive than ever to every other country. So, as it stands, Britain is benefiting on both fronts.
Of course, the effects that leaving the EU will have on British trade remains to be seen. But right now, Brexit is benefiting Britain in a big way.
Junior Analyst, Money Morning
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