Mark Lister , 31 August 2016

It’s been two months since the Brexit vote caught investors by surprise, sending financial markets into a tailspin.

The world hasn’t ended in the wake of this decision, and some of the first post-Brexit economic indicators actually point to the whole region holding up pretty well.

Is the turmoil still to come, or was the initial knee-jerk reaction as much of a misjudgment as the predictions Brexit wouldn’t happen in the first place?

As the votes were being counted, shares fell sharply, with the Japanese market down 8.5 per cent at one point. When Europe opened, France and Germany were hit even harder, falling more than 10 per cent that night.

Currencies saw even more volatility.

The British pound fell to its lowest level since 1985 against the US dollar, while investors flocked to traditional safe havens like the Japanese yen, bonds and gold.

But the turmoil was short-lived. The United Kingdom market took just four days to recover to its pre-Brexit level, while United States shares recouped losses within 10 days.

Since then, it’s been plain sailing. Global shares have rallied further, and the UK has been one of the strongest markets of all. It’s up almost 15 per cent and is even higher than where it was before the Brexit vote.

But hang on, there’s a catch.

While UK shares might be up strongly, the pound hasn’t recovered at all. In New Zealand or US dollar terms, UK shares are down at least 4 per cent from pre-Brexit levels.

The UK market is dominated by multinationals, and these companies have risen purely in response to the weaker currency.

The rebound in UK shares somewhat artificial, and is a reflection of a sinking currency more than anything else.

Still, it’s good that exporters have been getting a boost, and the few examples of hard data from the UK since Brexit suggest things aren’t as bad as first thought.

Retail sales rose strongly in July, beating expectations as well as the previous two months. Manufacturing export orders hit the highest levels in two years, jobless claims have fallen, and at least one home-building company has reported no affect on recent sales.

It’s been a mixed story in Europe, too, which was expected to be hit with a wave of uncertainty.

German business confidence is down, but the August PMI (a business activity survey) reached a seven-month high, showing no signs of a Brexit-induced slowdown.

There’s a long way to go for the UK to disentangle itself from Europe, and this process will undoubtedly cause a few casualties along the way.

The pound could be one of these, and I really can’t see a sustained bounce on that front, despite what Kiwis holding the British currency are hoping for.

However, Brexit is far from being a complete disaster for Britain, Europe and certainly the rest of the world. We might be in the calm before the storm, but for now it looks like markets might have overreacted.

This article was originally published in the New Zealand Herald on 31 August 2016.