FILE PHOTO: French President Emmanuel Macron meets with British Prime Minister Theresa May at the Fort de Bregancon in Bormes-les-Mimosas, France, August 3, 2018. Sebastien Nogier/Pool via REUTERS/File Photo
UK prime minister Theresa May and French president Emmanuel Macron are both dealing with political crises © Reuters

A US banker is offered a bonus to move to London or Paris. Eyeing chaos in the House of Commons and on Paris streets, she thanks her boss wryly. To help make her choice she uses Lex’s Inverse Shambles Ratio (ISR). The lower a nation’s rating, the greater its allure as a domicile and investment.

Real estate is the first component. France wins. A lower population density leaves more space to enjoy. A square foot of housing, says CBRE, costs $617 in London and $593 in Paris. The latter is more sustainable. The full risks of a hard Brexit are not reflected in a UK standardised price/income ratio which is 10 per cent more expensive than across La Manche.

Our banker then studies creditworthiness. Trader friends are nervous about both countries’ IOUs. French president Emmanuel Macron and UK chancellor Philip Hammond have been loosening their purse strings in hopes of quelling hostility. France’s fiscal deficit to gross domestic product ratio will probably bust through the EU’s 3 per cent ceiling in 2019. But closed EU/UK borders would hurt British finances far worse.

However, French and British five-year credit default swaps, a form of insurance against non-payment, both cost about 40 basis points, against 12 bps for Germany. Gilts yield 1.2 per cent for 10 years and French OATs just 0.73 per cent. The European Central Bank will stop its bond buying this month. But with interest rates at zero it may have to revive the policy to support growth, suppressing French yields. OATs are the best bet. France wins again.

The UK can only fight back in equities. The FTSE 100 and CAC 40 indices generate similarly large proportions of income overseas. The British benchmark trades about a tenth cheaper in terms of price to earnings. The pound’s weakness is another bonus for UK blue-chips.

So, France wins with an ISR of 1:2. Goodbye bungling Britain, hello fumbling France? Our banker calls her boss. “I’ve made my choice,” she says, “I’ll go to Frankfurt.”

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Sign up at ft.com/newsletters

Get alerts on Brexit when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article