Friday, July 29, 2016

Summary of the Brexit Impact on UK Economy

Experts have been arguing on their blogs, on live talk shows on TV etc that leaving the European Union would cause significant damage the UK Economy. As you might have seen in the various articles in this Brexit Series, am a little skeptical of these Extreme claims.
Yes, it is nearly impossible for the UK to come out unscathed post Brexit because it has been a pivotal member of the EU and its economy is tightly coupled with the EU Economy. However, as I said before, the extreme claims made by some economic experts may not be so true.
Many of the negative effects from the separation of the UK ultimately stem from the loss of many benefits that the EU brings to its member states. Holding the status as the gateway to the EU, the UK has actually enjoyed being a financial and trade hub for foreign multinationals for many years now. A Brexit would threaten this status and potentially create havoc if firms start to relocate and pull funds out of the UK.

For the Brexit to be beneficial to the UK, the British Parliament would have to put in place policies to ease the economy into the transition so as to prevent the immediate short term shocks from rocking trade and employment. Its ability to weather these shocks would also depend on the UKs ability to quickly reestablish free trade rights with the EU, returning the UK to its previous title as the “Gateway into Europe”

On the global front, the value of the British voice in international politics may see the UK being sidelined in areas such as environment and international security. This assumption is taken from the fact that being an independent state, its influence would be smaller than the EU as a whole. However, if successful in obtaining independent trade deals with US & China, the growth in the UKs economy may uplift the UKs overall importance in the global economy.

In reality, it is possible that Brexit will have a modest negative impact on economic growth and job prospects in the UK in the near future. At the same time, this Brexit gives the UK flexibility to customize its immigration & trade policy to its advantage. This will eventually help offset the negative impact in long run and even be a potential blessing in disguise.
If they are able to sign favorable trade deals with foreign nations, tighten up the immigration system and optimize the funds saved on the public spending side, they could potentially boost their economy and GDP.

To Summarize, below are the areas where the UK will stand to Gain & Lose as a result of this Brexit.

Areas of Gain:
1.    Lower Regulatory Rules (Ones that get applied by virtue of the EU Membership)
2.    Savings on Public Money contributed towards the EU Budget
3.    Ability to Negotiate Favorable Trade Deals Freely
4.    Ability to Customize their Immigration Policy to suit their Needs

Areas of Loss:

1.    Potential Fees & Tarrifs on exports to the EU
2.    Loss of Access to the Single Market
3.    Direct Impact to the City of London
4.    Potentially lower FDI

Disclaimer: All views presented in this article are those of the Author and are not endorsed by anyone. While every effort has been made to ensure that the data quoted and used in this article is reliable, there is no guarantee that it is correct, and the Author accepts no liability whatsoever in respect of any errors or omissions. This article is only economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.

Brexit and its Impact on the property market in the UK

In the past few articles we have covered various aspects of the impact Brexit would have on the UK and its economy. In this article we are going to cover the impact on the property market in the UK. 

First we start off with the current property market situation in the UK. Then we will review the potential impact that Brexit could have on the same with special emphasis on the city of London. 

Current Status of the British property market

The British Property Market has been an extremely popular investment avenue especially for foreign buyers. Statistics show that in the years 2014 and 2015, around 50% of the all commercial property purchase transactions were by overseas buyers.

Will this be Sustained?

As we saw in the article on the impact Brexit would have on Foreign Direct Investment in the UK, it is quite possible that FDI inflows will continue to hold-up the current levels rather than take a drastic fall as many people have predicted. This is primarily because, majority of the buyers of commercial property in the UK don't do it for operational purposes. They use them as investments instead. Secondly, a robust legal system, the English language, transparency of the British Market etc. are not a consequence of the EU Membership. They have existed even before the EU was formed. Therefore, it is highly unlikely that the UK Property Market will go into a Deep Slump as people predict.

The City of London and Brexit

Of all cities/towns in the UK, if there is one city that is going to be at the heart of this Brexit Impact on the UK, it would be the capital city of London.
The argument here is very straightforward. If companies are forced to relocate to other parts of the EU to continue their EU Operations, demand for office locations in London could shrink significantly. Even if companies don't do a full relocation, they could potentially scale back their operations in London which would again have the same negative effect. As with any city that boasts of being a Financial Hub, there are numerous projects that are always in pipeline to create more office space for businesses to expand & occupy. With this potential slow-down, the amount of office space available for occupancy could be well ahead of the utilization rates. That means – Vacancy Rates for Properties will go up and Rental Values will go down.
As a consequence, the premium commanded by the city office space may no longer grow at the rate it has grown over the past 15-20 years. In fact, property prices have literally doubled in the last 15-20 years in central areas of the city. This all in paper could potentially cause the property prices to fall by around 8 to 15% depending on the exact location of the property.

However, of crucial importance is the fact that, financial services companies aren’t the only ones that have been driving up the consumption rates of office space in central London or even in the city as a whole. Yes, financial services contribute about 16% of the space being utilized but the rate at which new jobs have been created in this industry has been quite slow @ 6%. So, bulk of the office space that is currently available is being used by other professional, scientific and technical services. Most likely these will continue to operate in the city even after the Brexit terms is finalized.

Couple that with the fact that, the city office space vacancy rate is just 5% in London. It is quite possible that firms have been reluctant to expand into London citing this space constraint. So, if the demand from the financial services side goes down, it could be a blessing in disguise as it could potentially boost the availability (and as a result drive the demand) for other sectors. If this happens, the fall in property prices as well as rental yields may not fall by the 8-15% as was mentioned a little while ago.

Some Last Words: Neutral Outlook

It is very clear that the City of London is going to bear the brunt of the Brexit impact on the British Property market. However, the damage that could be done isn’t as catastrophic as one would imagine. There could a small setback in the short run which could result in a minor price correction. But, it is very possible that prices will stabilize and the market will get back on its feet in a few years’ time.
Of course, the eventual impact is going to hinge crucially on the terms that the United Kingdom can negotiate with the EU.

Disclaimer: All views presented in this article are those of the Author and are not endorsed by anyone. While every effort has been made to ensure that the data quoted and used in this article is reliable, there is no guarantee that it is correct, and the Author accepts no liability whatsoever in respect of any errors or omissions. This article is only economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.

Tuesday, July 19, 2016

Brexit and its Impact on the Financial services Industry

In the past few articles we have covered many different aspects of the Brexit Impact on UK and its economy. London is considered one of the international financial hubs and hence this Brexit is going to have profound impact on the financial services industry of the country. 

First, we start off by looking at the economic contribution of Britain’s financial services exports to the European Union. Then we assess how a new policy regime might negatively impact on these exports post-Brexit. Lastly, we will also talk about how this exit could benefit the prospects for British exports.

The Importance of Financial Services to UK’s GDP 

Accurate statistics for recent years Financial Services Exports by the UK are not available on the internet. As of 2013/14 exports of Financial Services contributed about 1% of the British GDP. 1% may sound small but if we take Britain’s 2013 GDP, it works out to about 25 Billion USD. Again this is just the number from 2013 and with the growth in the Financial Services industry in the UK, this number could potentially be much higher. 

Brexit – A Threat to the Financial Services Sector?

The single biggest risk that multinational firms would foresee as a consequence of the Brexit is the “Passporting Rights”. In layman terms, a US Bank could just obtain license to operate in the UK and on account of UK’s EU Membership, they could operate in many different EU Nations without actually having to set up a subsidiary company there. Get the idea? 

With the type of infrastructure and political stability that the UK has long boasted, most multinational banks, insurance cos and financial cos set up branches in the UK and offered their services to the EU nations. 

Of course, things could be as simple as the foreign banks set up a subsidiary company in another EU nation and then continue their operations in the UK. But, this is just wishful thinking. It is quite possible that the UK is going to lose a lot of its financial services business. Experts predict that the exports of financial services to the EU could fall by as much as 50%

To avoid this, the United Kingdom could preserve its single market access and passporting rights if it remained in the European Economic Area. But, as we discussed in prior articles, this may not be a favorable outcome for the voters who chose Brexit, as Britain would have to adopt all European Union financial rules & regulations. In fact, as a consequence of not being an actual member of EU, they would even lose their ability to block any new regulations that could potentially damage them. 

Of course, even being a member of the EU, the UK does not have full control over the financial regulations set up by the EU. For example, in 2013, the EU wanted to bring a regulation that would introduce an upper cap on banker’s bonuses which the UK was very much opposed to. Still, the new regulation was passed because the other EU nations wanted it. I could throw in a couple of more examples where the UK was either successful or unsuccessful with regards to new financial regulations brought in by the EU but that wouldn't serve the purpose. The point here is, being a EU member the UK would have a say in new financial regulations that are being considered. By being just a member of the economic area, the UK is going to lose this ability. 

Worst case scenario, the EU could deliberately try to undermine the UK to win business for other EU members like Germany or France. 

If Britain did not want to stay in the European Economic Area, it could still negotiate bilateral trade agreements with the European Union, as Switzerland has done. But Swiss banks do not have direct passporting rights and so operate their European investment banking businesses through subsidiaries in London. Considering the fact that the UK is leaving the EU, chances of their negotiating a deal as good as the Swiss did is highly unlikely. With this Brexit, there is a high chance that those banks would want to relocate to another nation that offers the flexibility to offer services to the EU nationals.

To make matters worse, the EU is coming up with a new financial regulation in Jan 2017 which will force all non-European Economic Area providers of financial services to have equivalent levels of regulation in their home country before they can do business across the EU. This new directive is called “Markets in Financial Instruments Directive II”

So, Britain’s financial services exports to the European Union would most probably be hit hard by Brexit. 

Does Brexit Present Any Opportunities to UK? 

There is a decent chance that London will continue to prosper even after the UK leaves the EU. London was a longtime financial hub even before the EU came into being. The city comes with it advantages, including a strong legal system, English language, a convenient time zone that is perfectly placed with working hours that overlap with both Asia and New York, a large pool of skilled labor and a ton of expertise in support services like accounting. 

As we saw in the previous section, it looks very possible that exports to the EU will suffer but, these losses could get offset in the long-term by the greater opportunities to boost trade ties with non-EU countries. This Brexit would free the United Kingdom from the limitations of the EU’s Common Commercial Policy, which prevents EU members from negotiating bilateral trade deals by themselves with other countries. 

This potential for growth in trade with countries outside Europe applies to all exports but is perhaps more pertinent for financial services. As you can see from the pie chart below, the EU Accounts for the biggest chunk of the UK’s financial services exports. However, the chances of growth in Asian markets like India & China as well as ability to expand their exports to USA or Canada could be vital for UK in the long run. Of course, this is under the assumption that they can negotiate favorable trade deals with non-EU nations which is highly likely. 

Some Last Words: 

A short term threat but a potential long term opportunity
At the outset, the Financial Services industry is going to have a big speed bum right away post Brexit and will probably be the biggest impacted sector. Even in a best case outcome in which passporting rights get preserved, the UK would still lose influence over the single market rules. The UK and London in particular will be hurt in the short term but it will not be a disaster. 

As you saw in the previous section, London’s competitive advantage existed long before the EU was formed and with flexibility to negotiate deals with non-EU nations by themselves, this Brexit could pay dividends to the financial services sector in the long run. 

Yes, there is a chance that the UK may no longer be the financial hub of Europe. Post Brexit, foreign firms may begin to reconsider their position and potentially relocate to EU states such as France or Germany in order to maintain their market share and avoid higher costs of operation should the Euro Zone insist that Euro denominated transactions be moved out of London. This potential shift of capital flows and investments from the UK to other parts of Europe may also tempt some companies, possibly including financial institutions to relocate out of the UK so as to seek better opportunities. 
On the upside, the Brexit would free the financial sector from EUs complicated regulatory restrictions. However, this may not translate to financial deregulation as it will be unlikely that the UK government will stray far from their EU counterparts in order to preserve financial competitiveness and stability. 
All in all, it will be a short term threat but has the potential to become a long term opportunity for the UK.

Disclaimer: All views presented in this article are those of the Author and are not endorsed by anyone. While every effort has been made to ensure that the data quoted and used in this article is reliable, there is no guarantee that it is correct, and the Author accepts no liability whatsoever in respect of any errors or omissions. This article is only economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.
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