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Big investment houses warn of inequality risk after Brexit Big investment houses warn of inequality risk after Brexit
(2 months later)
Britain’s historic vote to leave the EU has prompted some of the world’s most powerful investment houses to turn their focus to inequality.Britain’s historic vote to leave the EU has prompted some of the world’s most powerful investment houses to turn their focus to inequality.
Bank of America and the international investment firm Pimco have warned their clients that the gulf between rich and poor could spark a further anti-establishment backlash.Bank of America and the international investment firm Pimco have warned their clients that the gulf between rich and poor could spark a further anti-establishment backlash.
Financial markets had largely bet on a remain vote in last week’s referendum and were stunned by the result, with an unprecedented $2tn wiped off the value of global shares in a single day. The victory for the leave camp has acted as a wake-up call to investors over the scale of disillusionment among voters who still bear the scars of the financial crisis.Financial markets had largely bet on a remain vote in last week’s referendum and were stunned by the result, with an unprecedented $2tn wiped off the value of global shares in a single day. The victory for the leave camp has acted as a wake-up call to investors over the scale of disillusionment among voters who still bear the scars of the financial crisis.
The warnings over inequality come as a respected thinktank releases fresh evidence that low- and middle-income families in Britain have seen their living standards stagnate for more than a decade.The warnings over inequality come as a respected thinktank releases fresh evidence that low- and middle-income families in Britain have seen their living standards stagnate for more than a decade.
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The Resolution Foundation found weak income growth and rising housing costs had effectively wiped out gains for half of working households since the early 2000s and it called on politicians to address households’ rising dissatisfaction.The Resolution Foundation found weak income growth and rising housing costs had effectively wiped out gains for half of working households since the early 2000s and it called on politicians to address households’ rising dissatisfaction.
For Pimco, a global investment house with $1.5tn under management, and which had warned of a “significant” chance of Brexit before the referendum, the outcome highlighted wider trends that should put politicians on alert for more protest votes.For Pimco, a global investment house with $1.5tn under management, and which had warned of a “significant” chance of Brexit before the referendum, the outcome highlighted wider trends that should put politicians on alert for more protest votes.
Joachim Fels, a global economic adviser at Pimco, wrote in a research note: “As I see it, the vote in the UK is part of a wider, more global, backlash against the establishment, rising inequality and globalisation.Joachim Fels, a global economic adviser at Pimco, wrote in a research note: “As I see it, the vote in the UK is part of a wider, more global, backlash against the establishment, rising inequality and globalisation.
“Even if populist, separatist and nationalist parties don’t come to power, the Brexit shock is likely to intensify the pressure on current and future mainstream governments to address inequality, become more protectionist and limit migration.”“Even if populist, separatist and nationalist parties don’t come to power, the Brexit shock is likely to intensify the pressure on current and future mainstream governments to address inequality, become more protectionist and limit migration.”
Pimco, which counts the former UK prime minister Gordon Brown among its advisers, said this month that there was about a 60% chance British voters would opt to stay in the EU.Pimco, which counts the former UK prime minister Gordon Brown among its advisers, said this month that there was about a 60% chance British voters would opt to stay in the EU.
Now writing days after the 52%-48% victory for the leave camp, Fels said the Brexit message on inequality and its political impact meant investors should factor in a higher risk of stagflation – a damaging combination of higher inflation and slower growth – over the next three to five years.Now writing days after the 52%-48% victory for the leave camp, Fels said the Brexit message on inequality and its political impact meant investors should factor in a higher risk of stagflation – a damaging combination of higher inflation and slower growth – over the next three to five years.
Fels wrote: “This would likely come to pass if current or future governments turn more protectionist by erecting barriers to trade and migration, and take up or intensify the battle against inequality by redistributing income (through taxation and regulation) from capital to labour. This could lower potential growth even further and would likely lead to higher wage and inflation pressures.” .Fels wrote: “This would likely come to pass if current or future governments turn more protectionist by erecting barriers to trade and migration, and take up or intensify the battle against inequality by redistributing income (through taxation and regulation) from capital to labour. This could lower potential growth even further and would likely lead to higher wage and inflation pressures.” .
There was a similar focus on inequality in post-referendum analysis from the investment bank Bank of America Merrill Lynch.There was a similar focus on inequality in post-referendum analysis from the investment bank Bank of America Merrill Lynch.
In a research note entitled Brexit and the war on inequality, Bank of America strategists highlighted regional disparities in the UK, partly due to the capital’s soaring house prices. In 2015, London accounted for 28% of all English housing sales by value despite accounting for just 1-2% of the total land area, noted strategists Michael Hartnett and Brian Leung.In a research note entitled Brexit and the war on inequality, Bank of America strategists highlighted regional disparities in the UK, partly due to the capital’s soaring house prices. In 2015, London accounted for 28% of all English housing sales by value despite accounting for just 1-2% of the total land area, noted strategists Michael Hartnett and Brian Leung.
“Brexit is thus far the biggest electoral riposte to our age of inequality,” they added. “Our secular conclusion is that investors must start to anticipate new populist policy responses.”“Brexit is thus far the biggest electoral riposte to our age of inequality,” they added. “Our secular conclusion is that investors must start to anticipate new populist policy responses.”
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Offering a US perspective on the referendum, they said: “The Brexit vote was a shock to Wall Street because an electorate in a country with no economic or financial crisis voted to dramatically change its political status quo. This partly reflects the fact that economic recovery in recent years has been a) deflationary and b) unequal.”Offering a US perspective on the referendum, they said: “The Brexit vote was a shock to Wall Street because an electorate in a country with no economic or financial crisis voted to dramatically change its political status quo. This partly reflects the fact that economic recovery in recent years has been a) deflationary and b) unequal.”
Their focus on how the housing market affects wealth in the UK is echoed in a report published on Tuesday by the Resolution Foundation. The thinktank finds that by eating away at living standards, rising housing costs and lacklustre wage growth have provided the backdrop to disillusionment with the political and economic status quo.Their focus on how the housing market affects wealth in the UK is echoed in a report published on Tuesday by the Resolution Foundation. The thinktank finds that by eating away at living standards, rising housing costs and lacklustre wage growth have provided the backdrop to disillusionment with the political and economic status quo.
By including the drag on living standards of housing costs, the report suggests that family finances have been more squeezed than other, more commonly used measures of incomes imply. The authors say the squeeze started well before the financial crisis and has occurred despite record low interest rates in recent years. The biggest impact was on low- to middle-income households, they found.By including the drag on living standards of housing costs, the report suggests that family finances have been more squeezed than other, more commonly used measures of incomes imply. The authors say the squeeze started well before the financial crisis and has occurred despite record low interest rates in recent years. The biggest impact was on low- to middle-income households, they found.
Torsten Bell, director at the Resolution Foundation, said: “There were many factors – both cultural and economic – behind Britain’s decision to back Brexit last week.Torsten Bell, director at the Resolution Foundation, said: “There were many factors – both cultural and economic – behind Britain’s decision to back Brexit last week.
“But stagnating living standards have been an important background to rising dissatisfaction with the economic and political status quo, particularly among poorer households. The fact that the British people have seen successive governments fail to seriously address problems that are well within their control, such as housing, has only reinforced that feeling.”“But stagnating living standards have been an important background to rising dissatisfaction with the economic and political status quo, particularly among poorer households. The fact that the British people have seen successive governments fail to seriously address problems that are well within their control, such as housing, has only reinforced that feeling.”