The UK is down since Brexit, guess who’s up

When British voters decided in June 2016 to exit the European Union, investors who had anticipated the opposite result stampeded out of sterling and the currency plummeted a record 8.05 percent to a 31-year low. Almost 20 months later, the pound has mostly recovered, providing some satisfaction to commentators who’d predicted that Brexit would prove more distressing to the EU.
So much for wishful thinking. In a role reversal not even the most prescient dared to anticipate, Greece is growing faster than the UK and outperforming it in financial markets. That’s because Greek citizens, who rejected bailout terms from EU creditors in a July 2015 referendum, never embraced a rupture with Europe or the return to a drachma-based economy. Now that Europe is leading the developed world in growth, productivity and job creation after the euro gained 14.2 percent last year — the most among 16 major currencies and the strongest appreciation since 2003 — Greece is the biggest beneficiary and Britain is the new sick man of Europe.
Since the Brexit vote on June 23, 2016, the pound remains the worst-performing currency even after the dollar weakened 12 percent in 2017, according to data compiled by Bloomberg. The euro has strengthened 8 percent since then and appreciated more than a dozen of the major currencies. For the countries participating in the EU without using the euro, the outcome is similar since the Brexit vote: Czech korunas gained 16 percent; the Polish zloty, 13 percent; the Hungarian forint, 10 percent and the Danish krone, 8 percent, Bloomberg data show.
The pound is alone in its increasing instability as measured by implied volatility, the metric of investor uncertainty about the U.K. Sterling’s fluctuations began exceeding those for the euro in 2016. For the first time since the European currency was created in 1999, the pound has never been so volatile over so many months, according to data compiled by Bloomberg. It’s also unprecedented for the British currency to lose so much confidence in foreign exchange that it resembles the emerging-market zloty in daily trading — an ironic footnote to the hostility against Polish immigrants that helped propel Brexit.
In the bond market, Greece is the king of total return (income plus appreciation), handing investors 60 percent since the Brexit vote. UK debt securities lost 3 percent, and similar bonds sold by euro-zone countries gained 7 percent during the same period, according to the Bloomberg Barclays indexes measured in dollars. Since March 1, 2012, when the crisis of confidence over Greece was at its peak and its debt was trading at 30 cents on the dollar, Greek bonds have returned 429 percent, dwarfing the 19 percent for euro bonds and 10 percent for the UK, Bloomberg data show.
For the first time in at least five years, UK growth is inferior to the euro zone’s, and 53 economists surveyed by Bloomberg predict that Europe’s superior increase in gross domestic product last year will continue through 2019. The same analysts also forecast that Greece will overtake Britain in GDP growth. They expect Greece to see its GDP rise 2.15 percent this year and 2.2 percent in 2019 as the UK grows 1.4 percent and 1.5 percent. The euro zone is poised to expand 2.2 percent and 1.8 percent during the next 24 months, according to data compiled by Bloomberg.
Equity investors are showing a similar shift in favor of the euro zone among exchange-traded funds. Throughout most of the past 12 months, net flows to Europe surged to the highest since April 2016, mostly at the expense of the UK, Bloomberg data show. ETF flows to Europe gained 15 percent and 13 percent to the UK during the same period. The Global X MSCI Greece ETF, the largest US-based exchange-traded fund investing in Greek companies, is benefiting from a 35 percent increase in net inflows since the 2016 Brexit vote.
Not bad for a country that was thought to be on the brink of collapse just three years ago by luminaries including former Federal Reserve Chairman Alan Greenspan and billionaire investor George Soros. “It’s only a matter of time” before Greece defaults and leaves the euro, Greenspan told the British Broadcasting Corp. in February 2015. A month later, Soros told Bloomberg Television that Greece could go “down the drain” because “it’s now a lose-lose game.”
No one is saying anything like that about the UK just yet.

—Bloomberg

Matthew Winkler is an American journalist who is a co-founder and former editor-in-chief of Bloomberg News, part of Bloomberg L.P. He is also co-author of Bloomberg by Bloomberg and the author of The Bloomberg Way: A Guide for Reporters and Editors