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  • Writer's pictureConor O'Donoghue

The Changing of the Guard

No city does pomp and ceremony like the home of the British Royal family, London. Even the most fervent anti-royalist would admit to feeling some grudging attraction to the pageantry at the heart of the city. Royal funerals and weddings are an embodiment of London grandeur. Bold colours, ornate carriages, solemn marches down grand avenues. Waiting for royal weddings and funerals to get to see the royal theatre at its finest is unnecessary. Every tourist to London will be directed to the grandiose changing of the guard at Buckingham palace. The new guard marches up to Windsor castle, the London home of the monarch and replaces the old guard. As resplendent and visually appealing as it is, the changing of the guard has become a metaphor for ‘out with the old and in with the new’. For London the metaphor is apt.


London is one of the world’s great cities. The city is a truly global centre of empire, culture, of the creative arts and most important of all, finance. When the British state was a burgeoning empire with a powerful navy that projected power across the globe, London provided the finance, indeed the Bank of England was set up to fund a powerful navy to rival its arch enemy France. Where the navy went, merchants and commerce followed. Overseas buccaneering needed capital. London was able to provide it. A patchwork of banks in an emerging financial system was able to provide the money to conquer and then trade, in that order.


Eventually London became more a more powerful financial centre than Amsterdam, Europe’s first stock market. London did banking (debt) and equity (stock). After the financial and physical damage wrought by the fire of London of 1666 and the need to manage such destruction, London became the global centre of insurance. Lloyds was to become the biggest insurance company in the world and life assurance, invented in London by William Talbot, was soon to follow as a new financial product. As the industrial revolution cranked up London became the biggest financial centre the world had ever seen. The London Stock exchange provided capital for railroads, steel, mining and manufacturing, Lloyds the insurance for global shipping and bills of exchange for merchants. London cleared and deposited securities, gathered and distributed capital, sold policies and generally grew rich. At the start of the 20th century, the British empire ruled the world and London was the global centre of commerce and finance. It seemed it would be that way forever.


Then World War I happened and the first globalised economy shuddered to a halt. Slowly but surely, London’s pre-eminent position declined. A new power from the new world and a new global financial capital. Some of the displaced Amsterdam traders from the 17th century had set up an informal securities market known in Dutch as de Waalstraat or Wall street in English, on a marshy island off the coast of the Americas. By the time World War II was finished, New York was the new global financial capital and London’s decline continued with empire and influence in rapid retreat.


Practice in ‘The City’, as it became known had grown old too. Industry was factional and controlled by an old boys network. Talent was secondary to social connection and status. Effectively the financial industries in London operated like guilds, putting up barriers to entry, enacting arcane rules and ancient practice. Innovation had shrivelled and London’s worldview was small and myopic. In 1987, the conservative government, led by a radical reformer outside the gentry, recognised the deep structural issues in the financial services market. Margaret Thatcher loathed the old boys network that controlled the City and ran the Tory party. She pushed the complete deregulation of the UK financial market in what became known as Big Bang. The results of deregulation were instantaneous but the UK was not a wealthy country in the 1980’s. The immense wealth and expensive real estate that is a feature of modern London was still rare. Big Bang paved the way for London to recover and become the most vibrant domestic financial market in Europe just in time for the most important event in modern London financial history. The Maastricht treaty in 1992 opened up all of the European financial markets, previously protected, to a newly match fit and lean London. The European financial markets were equally staid and unprepared for what was to come. London quickly became the European base for US and European banks, looking to consolidate and sell into the single European financial market of 500 million people by the 21st century. Drawing on its deep tradition and common law, London became the financial capital of Europe and dominated the deregulated European financial services market. Paris resisted, but it was no match for London and French leaders eventually accepted the new order. German leaders, finding their feet after re-unification, did so from the start.


By the Olympics of 2012, London was able to showcase itself as one of the wealthiest places on the planet, where oligarchs parked their wealth in Mayfair properties, capital flowed to US technology start ups and funds were managed and distributed to wealthy European clients.


With Brexit, a new inflection point for London has come. Inexplicably, a financial services deal on Brexit was sacrificed on the altar of national sovereignty. London’s encore as Europe’s financial capital is coming to an end. As surely as the new soldiers, magnificently decked out in red and bearskin hats, march towards Windsor Castle, we are witnessing a changing of the guard in the financial order.


There is talk in London of a Memorandum of Understanding (MoU) between London and Brussels. The City wants mutual wholescale equivalence, both the EU and the City to recognise each other’s standards and regulation, and therefore be able to freely trade financial services to each other. It has begun to dawn in London that will not happen. Instead, product line by product line, Brussels will claw back its financial services into the EU, as it builds the capacity to do so. The mammoth Euro derivates market, primarily based in London, that corporates use to grease the wheels of commerce will be the grand prize for the EU. European capital markets operate like a plumbing system routed through the massive pump and boiler in London. The system won’t work if disconnected from London right now. Instead, European capital markets are slowly disassembling the system, recreating smaller specialist capital markets to replace London, in familiar places like Amsterdam, Frankfurt, Dublin, Paris and Luxembourg. Like a great blue whale that dies and falls to the bottom of the ocean, London will be slowly but surely, helplessly picked clean by predators in the years to come.


The City insists nowhere in Europe has the legal and regulatory infrastructure to match London, and European companies will lose out. Whether that sentiment is right or wrong we are about to find out.


There is a changing of the guard in financial markets. Like the old guard, London is being slowly marched down the street. Investors should note same. There will be significant second round affects.


  1. Property – London property was a reliable store of value for Irish tycoons, Middle Eastern sheiks and Russian émigrés amongst others. If capital begins to flow out of London or sterling, the top end of the commercial office and residential market may start to move. Fickle foreigners won’t let the door hit them on the way out. Owning London property long term at these prices is difficult to justify. Yields are moving up quickly in London retail (values going down), office and residential will follow. Much better valuations are available in the UK outside the capital.

  2. UK Government Debt (Gilts). The financial sector is a massive contributor to the UK treasury, on the income and corporate tax lines. There are lots of associated companies and employment attached. If the financial sector tax revenue start to seriously impair, international bond markets will notice. A blow out in UK bond yields is the single most likely event to disrupt global markets. London is the Golden Goose and the hatchet is being sharpened in Brussels.

  3. UK Stocks – Stock markets are future cash flow discounting vehicles. The problems in London and the UK are already baked into UK shares. The US trades on a cyclically adjusted price earnings number of 37, European markets trade on 21 times CAPE, whereas the UK trades on 15 times CAPE. In other words, lots of really bad news is baked in to UK shares on a relative basis. UK shares may offer real value if you believe the negative prognosis outlined is not going to emerge. Even if it does there is quite a bit of value protection with only Russian and Turkish equites cheaper.


So go long UK stocks and non-London property. Sell London property and UK gilts. You know it makes sense.


The Jesuitical zeal of Brexiteers for sovereignty is about to be doused by the reality of a flailing City of London. Perhaps that might force some fresh thinking on the UK’s relationship with Europe. That appears to be the only thing that makes sense. The thing about the changing of the guard is that the new guard becomes the old guard pretty soon. Who is to say that London cannot reinvent itself again.

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