The Global Economy Could Be In Trouble If UK Doesn’t Handle Brexit Carefully

Posted on June 29, 2016 in GlobeScope

By Mousom Singha:

On June 23, 2016, the United Kingdom voted to opt out of the membership in the European Union. While this has a plethora of outcomes for the island nation and the Union it left behind, most of them are yet to be played out when Britain actually pulls out of the 28-member group, invoking, the much talked about, Article 50. Till such time, the stakeholders in the UK and outside, can only predict and adjust their course, in the continuation of their relationship with the latest non-member nation of the EU.

Britain has argued principally against the EU on its policy towards immigration. The leaders who headed the ‘Leave’ campaign had augmented their line of reasoning with issues of jobs, crime, finance, law and, of course, trade. While, each of these focus areas require an in-depth critical analysis, it is understandably out of scope for a single article. Such an analysis of these highly irregular variables would not do justice to the topic at hand. I’ll be looking into a specific industry and the market it commands around the globe: commodities, and even more specifically, base and precious metals.

The progressive growth of London as a centre of global finance has paved the way for many development stage companies and those graduating from the exploration focused markets overseas. Investments from UK’s shareholders and equity funds flow into the growth behind many large mining corporations from Australia, which in turn, base their operations in Africa for numerous mining products.

Following the results of the referendum, there has been a knee-jerk effect on the prices of the base metals and the stock indexes of the companies trading in this industry. Copper, nickel and other base metal prices plummeted as the dollar appreciated in the wake of the results. An extremely curious thing happened simultaneously. The price of gold rose. Gold has strengthened to a two-year high based on the closing prices on the futures market in New York. Historically, the prices of gold and the dollar usually moved in the opposite directions. Even the price of platinum has risen ever so slightly. Many speculators say that this growth is sentiment-driven. And they have just cause to say so. The prices of base metals which are consumption driven have not changed or changed for the worse.

The following chart shows the slight downward curve experienced by the companies mainly trading in base metals along with the FTSE 100 index. However, it is noticeable that the two companies trading mainly in gold have an upward curve:

The stock index variation of mining companies in the FTSE 100 following Brexit
The stock index variation of mining companies in the FTSE 100 following Brexit

 

Many supporters of the ‘Leave’ campaign feel that Britain’s links with the EU are holding it back from forging ties with emerging markets evidenced by the lack of any major deals with China or India. However, about 45 percent of the total export by Britain goes to the EU. Putting up trade barriers may prove to be counter-productive for the island nation. China is one of the major exports market for the EU. A slowdown in the EU economy with the leave of the UK may result in the unwanted slowdown in the Chinese economy. If things go down as such, a gloomy question looms over: will China then be interested in setting up deals with the UK enabling the latter to achieve its original objective?

However, as of now, most of the major mining companies feel strongly about continuing their presence in the UK. Many of these have their primary stock listing in the London Stock Exchange, prominent among them being BHP Billiton, Rio Tinto and Glencore. Even the Indian mining giant Vedanta Resources has its listing in London. The Russian company, Polyus Gold is the largest London-listed gold producer and has decided to stay on. The same cannot be said for Nord Gold NV, another Russian company, which is prospecting a listing shift to Toronto after Brexit.

Another perspective of focus is the environmental laws enforced by the EU. Most of the mining companies are notoriously infamous for their disregard of environmental laws. This behaviour was checked under the laws laid down by the EU which all its member states must abide by. EU’s environmental laws were the catalyst for the UK’s own environment related laws. The EU also conducts technological and scientific research in these areas and provides guidance on the implementation of these rules. With Brexit, the UK has to bear the cost for an independent study and the further enforcement of its law. Among other priorities, the environment, in the past, has often borne the brunt of lack of resources and time.

With so many open-ended questions, the future of Brexit is certainly very muddy to predict. Only time can tell, how Britain will cope with the crisis at hand.

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