Post-Brexit Investor Outlook
April 06. 2021
With Brexit, the EU and the UK will eventually become two independent markets with distinct regulatory and legal jurisdictions for the flow of goods, services and people. This article briefly lays out some issues that both UK-based and foreign investors should consider in their investment decisions:
On the one hand, Brexit will cause losses in jobs and tax revenues in the UK as businesses move out due to uncertainty and higher costs. Investors may need to review their strategies correspondingly:
Uncertainty: The long-term regulatory status for EU-UK trade across borders is uncertain, especially for market access for the service sector and financial services.
Loss of Access: UK-based financial firms will lose market access despite a Trade and Cooperation Agreement (TCA).
Higher Costs: Added border bureaucracy will make trading and investing in Europe more complex and costlier with the imposition of non-tariff restrictions such as customs inspections, controls, customs processes, and certifications, as well as different EU and UK norms. Notwithstanding the TCA, suppliers will have to make changes to their current EU-UK supply chains, making them costlier and more time-consuming. The legal divergence between the two respective jurisdictions in the future may also raise operational costs.
Shortage of Talent: Working in the UK will no longer be an entitlement. Europeans will need permits for long-term stays in the UK and travel limits depending on immigration policies. The abolition of the mutual acknowledgement of educational qualifications will require new agreements on the reciprocal acceptance of technical credentials. As an interim risk, it could affect businesses by reducing the potential talent pool open to specific organizations and increasing their operating costs.
Loss of tax revenue and jobs – The result of this is that companies, especially from Asia, such as India, engaged in the cross- border trade in goods and services between the UK and the EU could realign their investment strategies. They have based their headquarters in the UK because of a shared history, culture and language, a solid financial services market in London, similarity in the laws in both jurisdictions, and frictionless access to the EU Single Market and Customs Union before Brexit. They have made significant contributions to job creation and tax revenue for the United Kingdom over the last few years across many sectors – financial services, information technology, pharma and automobiles. With Brexit, they could move operations out of the UK and set up in an EU Member State to avoid the additional expenditure of having separate entities in the UK and the EU. Ireland, for instance, could become an attractive jurisdiction.
On the other hand, many important sectors will remain intact, Brexit may enhance other sectors, and the UK will have the opportunity to forge new trading relationships. New openings for investments should arise:
Regulatory agreement – the EU and the UK have agreed to respect equal regulatory standards in areas such as environmental, climate change, civil, and labour rights, as well as the already high levels of labour security.
Tariff-free sectors: The TCA allows the manufacturing and export sectors to continue to trade across the EU-UK border free from any tariffs or quotas.
New Trading Relationships: The UK can now reset its economic and trade relations in the global market. For instance, in the future, the UK and India could leverage the shared culture and history between the two countries, enabling many Indian companies to make long-term investments in the UK, allowing the UK to salvage and strengthen its strategic economic relationship with India.
Innovation: The UK’s pre-eminence in critical sectors such as life sciences, R&D and technology, taken together with its lighter touch regulatory environment, compared to the EU, makes it an attractive location for companies to invest in these sectors. The innovations flowing from such investments are bound to contribute to the UK’s long term economic growth.
Property – Brexit and Covid-19 have caused some near-term disruptions in the UK’s economy and property market. However, Chinese HNWIs and other global investors still regard it as a safe, long-term investment opportunity for many reasons: London is a global financial powerhouse; an international destination for education; a haven for Chinese investors; the UK is a cultural melting pot; the weak pound; higher rental yields compared with the large cities in China; relatively high liquidity; diversification away from the home country; and a legacy for future generations, especially when considering the safety of the investment from a ‘rule of law’ point of view.
Moreover, London is a critical global city that attracts international businesses such as Apple, Google, and Facebook. It is making significant investments in infrastructure enhancing connectivity in an already well-connected city, with developments such as Crossrail, the largest construction project in Europe.
Markets Outlook – The continuing fear of the COVID pandemic, together with Brexit’s uncertainty, has caused volatility and a sluggish recovery in the UK and European markets. According to Charles Schwab, in a recent interview with City A.M., UK investors are now turning to China, Japan, and the US for higher returns. Although many investors have seen growth in their investments in these markets in the last three months, caution is the prevailing sentiment in the long term.
In summary – Businesses in the technology, life sciences and R&D sector look set to enhance their long term prospects by investing in the UK. Asian businesses, particularly India, have the opportunity to develop new and stronger trading relationships. The property market in the UK continues to offer superior lifestyle and legacy benefits together with long term growth in value. But investments in the equity markets are presently better served in the US and the Far East, particularly Japan and China.
MarketCurrents Events will host a virtual event on May 27 discussing Considerations for Investors Post-Brexit. We will be joined by family office investors who will discuss. Click here to learn more.