Britain bows out of EU amid optimism and regret: Industry reacts

Pedro Gonçalves
clock
Britain bows out of EU amid optimism and regret: Industry reacts

The UK will leave the EU at 23:00 GMT, ending 47 years of membership. Brexit Day, will mark the "dawn of a new era," according to Boris Johnson, providing Britain with a "moment of real national renewal and change". But in what is this generation's biggest gamble, others warn that the UK is taking a leap of faith into the unknown. 

Britain faces further uncertainty as both sides seek to strike a trade deal by the end of the year. In a symbolic move, Johnson will chair a meeting of his Cabinet in Sunderland, the city which was the first to back Brexit when results were announced after the 2016 referendum.

This evening, a clock will be projected on the façade of No 10 to countdown to Brexit. Buildings across Whitehall will be illuminated in the Union colours of red, white and blue while Union flags will be flown at Parliament Square and down the Mall.

Whatever deal the UK strikes, UK firms will be in a weaker position competing in Europe"

While the Brexiteers failed in their campaign to get Big Ben to bong in Brexit, they have organised a mass celebration in Parliament Square. Nigel Farage, the Brexit Party leader, is expected to be there.

On Thursday Downing Street reiterated the message that UK firms would then face extra paperwork and checks on goods at cross-channel borders under Johnson's plans to diverge from EU standards.

Downing Street has also acknowledged that businesses and travellers would be facing stricter border controls if the UK moves away from regulatory alignment with the EU.

As nothing will ever be the same, industry leaders from the financial world reflect on what the future might bring.

Richard Buxton, head of UK equities at Merian Global Investors said: "Whichever side of the EU membership debate you supported in 2016, one thing the vast majority of people seem able to agree on is the "other-worldly" quality that has characterised our national and political discourse in recent years. Setting aside the symbolism that some have attached to the date, after Friday's withdrawal of the UK from the EU, and the two parties have entered the transition period, the absolutely key issue from an investment and economic perspective will be to understand how the thorny topic of the "future relationship" will be resolved.

"My own view is that, ultimately, cooler heads will prevail and that, behind closed doors, UK decision-makers are not seriously considering arriving at the end of the transition period with no further plans or measures in place, given widespread recognition of the economic damage that would ensue. The Chancellor's recent announcement at Davos that the government's "first priority is getting an agreement with the EU" would seem to lend credibility to this argument. How the detail and results of the negotiations will emerge may ultimately have more to do with how ministers perceive that the debate will play out in public opinion than anything else. Still though, having a functioning government does strengthen the UK's negotiating hand; a series of compromises by both sides would seem to be a likely, albeit untidy, outcome.

"Regardless of the catchy and much-repeated soundbite regarding getting Brexit "done," most realists recognise that this is just the start of a multi-year process. One welcome fillip of the dawning realisation that Brexit won't simply be "done" from one arbitrary date to the next, is that if the stock market decides this is going to be a long, drawn-out and iterative exercise, with no credible risk of a "cliff-edge" exit, then its relevance to markets and significant parts of the economy could fade quite quickly. Such a result could be a real boon for UK equity investors, even if the route to this point has been long-winded and tortuous. Watch this space, and be ready to act; prudent investors - both international and UK domestic - will certainly be doing so."

BMO Global Asset Management's chief economist, Steven Bell, commented: "Whatever deal the UK strikes, UK firms will be in a weaker position competing in Europe. For example, the UK will be granted equivalence in financial services by the EU commission but they can withdraw this with just three months' notice. In many areas of services there will be no cliff edge at the end of this year. Much now depends on the spirit of cooperation between the UK and the EU27. For now, it's all friendly and constructive, but that is unlikely to last when the negotiations on the nitty gritty of the deals starts. Fish, which accounts for just 0.12% of UK GDP, could well prove to be a source of acrimony.

"Crucially all the blustering about Brexit has distracted attention from UK fundamentals. We avoided recession after the Brexit referendum but growth has been weak. Prime Minister Boris Johnson has ambitious plans to boost growth and he is pushing his Chancellor to ditch the fiscal rules and increase spending with a tilt toward the regions in his Budget on 11 March.  Business certainly needs a lift: wage inflation is rising but productivity is growing by less than 1%. 4% wage growth means costs rising 3% per year. But this is not consistent with 2% inflation, a problem that will get worse when the living wage is hiked in April. Something has to give. Another problem is the current account deficit which is wide and widening. We'll be watching sterling closely in the coming months, as this could be impacted."

Robert MacIntyre, head of Wealth Structuring Solutions at Lombard International Assurance said: "Front of mind for all wealth managers will be the issue of passporting rights. We have already seen UK-based firms with EU clients move some of their operations to the continent, and vice versa. Our HNW clients are increasingly internationally mobile and they will expect their cross-border wealth solutions to be unchanged, regardless of regulatory change. Firms will need to invest significant time and resource to ensure that the impact of Brexit on their client services is muted."

Michaela Walker, partner and head of Financial Services at Eversheds Sutherland, said: "Most asset managers have done their Brexit planning. So at the forefront of everyone's mind, as we finally exit, is whether we can reach agreement with the EU on a workable equivalence regime or if something more robust and durable can be negotiated. In any event, there is huge potential for the UK to provide an innovative, competitive and dynamic marketplace attracting global business and talent."

Alan Farkas, a partner at international law firm Dorsey & Whitney, shared his views on how Brexit will impact M&A and cross border transactions.

"Whilst Brexit inevitably caused great uncertainty and with it a significant drop off in M&A activity, there is a growing sense amongst both Corporates as well as M&A professionals that the tide may be about to turn.  Indeed, much has already been written about the "Boris Bounce," Farkas said. 

"It remains unlikely that there will be much clarity before the Autumn in relation to the specifics around a trade deal with the EU.  Between now and the end of the transition period under the Withdrawal Agreement, the UK Government will take action to stimulate the economy and lay out plans to reinforce the message that the UK is "open for business" and is an attractive place to invest," he added. 

Neil Wilson, chief market analyst for Markets.com: "The pound is up on Brexit day - there's your headline right there. Of course really this is about the interest rate decision by the Bank of England yesterday. GBP/USD has maintained its post-Bank of England bounce to hit new week highs at 1.31380. Looking for the key break of the previous high at 1.3170 in the near term. In terms of Brexit, our attention is fixed on March 3rd and the start of EU-UK trade talks. Without doubt these talks represent the chief risk event for sterling and for UK equities going into the rest of 2020. Sentiment on the pound could sour quickly if negotiations between the UK and EU falter once they get underway.  Indeed traders should be prepared for a troubled, rocky path for the talks and therefore expect significant headline risk for the pound in the coming months. There remains the threat of no deal and investors will be made acutely aware of this as the year progress - coming to potential mini-climax in June, when the two sides will need to be confident of agreement in time for Christmas."

Rob Price, Fixed Income portfolio manager at AXA Investment Managers: "The shadow of Brexit will fall again later in the year, but for now UK credit spreads offer a favourable window of opportunity."

"UK credit spreads in favourable environment in first half of the year as the near term runway appears clear for risk while uncertainty may increase as we approach the end of the Brexit transition period, at which point we expect the uncertainty around the future UK-Europe relationship to weigh on business investment."

"Risks may resurface towards the second half of the year if an FTA does not appear likely, even in a skeleton form,  bringing back the spectre of a ‘Hard Brexit' outcome in Jan 2021. In that case a degree of spread widening is almost certain, partly driven mechanically by the decline in gilt yields."

"Ultimately, further accommodation by the BoE and ongoing high demand for sterling fixed income products from cashflow focused schemes, should cap if not reverse such a spread widening."

David Zahn, head of European Fixed Income at Franklin Templeton: "Trade negotiations are arguably the most significant piece of unresolved work. The EU has allowed for the unfettered movement of people and goods within its 28-member countries. Now, the remaining 27 countries and the European Parliament must figure out how the goods and services relationship progresses with the United Kingdom outside the bloc."

"The early worst-case fears were tied to border gridlock preventing the movement of goods into and out of the United Kingdom, along with the potential for a massive departure of UK-headquartered multinational companies to other countries. While there have been a few hiccups, the worst-case fears largely haven't materialised."

"We have seen some UK companies leave the country, and business and consumer confidence have been negatively affected throughout the Brexit process. But, on the flip side, some domestic companies have benefitted from the weaker British pound as exports become cheaper to foreign buyers."

"The Brexit deal negotiated with the EU calls for the United Kingdom to leave the customs union. Still, Northern Ireland will continue to follow and enforce many EU rules, making for some potential sticking points at the border or in the middle of the Irish sea."

"That's just one localised border issue. The UK faces a transition period until 31 December 2020, to work out new trading relationships with other countries. Until then, it will follow EU rules and existing trading relationships. We are not the only ones who think 11 months is a very aggressive deadline for such a monumental task. Some countries have taken over 10 years to work through trade agreements."

"So, we would anticipate a lot of noise around trade this year, but UK Prime Minister Boris Johnson seems keen to start trade deals sooner rather than later."

"There is still a chance that the United Kingdom could crash out with no trade deal at the end of the year, but that would represent a systemic event that could result in a default to World Trade Organization rules. It is possible for the United Kingdom to ask for an extension on trade with the EU, but it would have to do so in June or July."

"European trade will be hit if there's no trade deal in place because it runs a big surplus with the United Kingdom. That all said, in the end, we are optimistic that the UK can get a deal done with the EU."

 

Subscribe to International Investment's free, twice-daily, newsletter