Is this what the ‘Remain’ campaign warned us about? Was the Armageddon scenario described in the aftermath of ‘Leave’ triumphing at the polls just belated in its arrival?
It would appear that way, because the latest news out of Old Blighty bodes poorly for the British economy.
M&G Investments, the UK’s largest commercial property fund, suspended trading today after investors began withdrawing capital in droves. The fund manages retail and office space assets as part of its sizeable £4.4 portfolio. As of 4:00pm AEST, M&G’s shares, which trade on the London exchange, were down 1.69%.
Why did this happen?
The short answer: uncertainty caused by Brexit.
The longer answer: M&G halted withdrawals because it doesn’t have enough cash on hand to repay investors. So it did the next best thing. When you can’t pay good on your agreement, slam the door shut and hope for the best.
In any case, you suspect M&G will now wait for the panic to subside before changing their tack.
Yet even this market shock, in isolation, is not what has markets so spooked. The bigger concern is that M&G is only the latest in a line of funds that have forced a trading halt in the past week.
Aviva and Standard Life both took similar measures to clamp down on capital flight. While not as big as M&G, these funds have portfolios amounting to £1.8 billion and £2.9 billion respectively. Their plight will have serious repercussions on the British economy. Worryingly enough, the last time investors were taking their money out of Standard Life was at the height of the financial crisis in 2008. Make of that what you will.
But should we have expected this? Weren’t we warned about the contagion effects of Brexit?
Yes and yes.
Those on the ‘Remain’ side of the referendum will point to this as yet more evidence that they were right. They’ll see it as confirmation that the divorce from the EU was more trouble than it was worth.
But it won’t be where the problems end.
According to Laith Khalaf, an analyst at stockbroking firm Hargreaves Lansdown, this is only the start: ‘The dominos are starting to fall in the UK commercial property market… It’s probably only a matter of time before we see other funds follow suit.’
As Khalaf explains, it might take some time for this situation in the UK to stabilise:
‘Given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices. The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.’
In practical terms, this development will affect commercial property values in the UK. According to industry analysts, London office values may plunge by 20% within three years of a formal break from the EU. However, this would still be below the falls seen during the GFC, when values declined by 40%.
What’s more, the Bank of England views commercial property as a ‘key risk to UK financial stability’. So there is clearly a fear that this situation blows out of control, sending the British economy hurtling towards recession.
And, what’s more, this is exactly the type of tremor that could reverberate around global markets as well. At this point, it doesn’t appear as if it’ll have the same effect as the sub-prime mortgage crisis had in 2008. Not least because it’s confined to a much smaller market. And because the tenterhooks don’t spread quite so wide.
But it is a timely reminder of the precarious situation in which the global economy finds itself in. We await the next domino.
Contributor, The Daily Reckoning