Guy Dobson, head of UK/NZ dual-domiciled financial education firm Dynamique, revisits Brexit seven months after the fact to find business – unlike politics – has adjusted its reality-set…
The impact of the shock result in the Brexit referendum last June and subsequent risk from the anticipated economic fallout has receded into the rear view mirror, according to a number of banks and leading financial institutions.
The widely-predicted Armageddon never happened: markets moved into more positive territory with the services sector showing particular post-Brexit resilience after hitting performance highs.
At the political level, negotiations between Europe and UK on the practical consequences of triggering the Article 50 EU withdrawal clause will no doubt drag on for years.
Most businesses, however, have taken the view that Brexit is a done deal, with potentially positive effects for the UK economy in the long term.
In other words, the predominant response to the prospect of an EU-less Britain has been ‘get over it and get on with it’.
The fall in sterling has not stopped the inflow of overseas investment into the UK economy. In fact, in many cases inward investment flows have increased, based on the premise that the UK currency is now significantly undervalued following its post-Brexit dive.
The recent release of official capital flow data for Q4 2016 shows the UK had few problems attracting the funding needed for its still large current account deficit.
Foreign institutional share investors have also been particularly strong buyers in the UK equity market of late.
So enough of the Brexit small-talk: what are the facts?
To separate truth from fiction, the US financial services firm State Street Corporation recently launched its Brexometer index – a quarterly survey of institutional investor sentiment towards UK’s departure from the European Union.
In the third quarter of 2016, a sample set of research was completed as a benchmark to be compared against a second survey completed in Q4 ahead of the launch.
Key findings of the Q4 State Street Brexometer index include:
- 63 per cent of institutional investors expect to maintain their holdings in UK assets (equities, bonds and/or alternatives) over the next six months;
- 80 per cent expect Brexit to have an impact on their operating models – up from three quarters (76 per cent);
- Almost half (48 per cent) expect the level of investment into the UK economy to fall during the next quarter, down slightly from 52 per cent in the inaugural findings;
- Just under a third (31 per cent) believes asset owners will decrease levels of investment risk over the next three to five years – up from 26 per cent previously. A quarter (26 per cent) think asset owners will increase levels of risk.
Michael Metcalfe, State Street Global Markets head of global macro strategy, sums up the findings as below:
- At just over six months removed from the UK’s EU referendum, markets seem to have mostly moved on;
- Questions over timing of the UK’s ultimate split from the EU and the nature of its future relationship still linger and have the potential to weigh on both the economy and the pound;
- So far, the extremely gloomy pre-Brexit predictions for the UK economy and asset markets look well off the mark.
What are we to make of all this?
It would appear that investors have already built Brexit (and possibly Trump) factors into their risk models.
At the same time, the done-deal thinking around Brexit is spurring financial firms to sharply increase innovative use of frontier technologies, seek opportunities in industry sectors and countries outside their usual hunting grounds as well as providing a wider range of client value-adding services.
There is also a perceived need to sharply increase CPD budgets to ensure that staff continue to be properly-equipped to take advantage of the rapidly-changing risk and opportunity environment of the new world order.
Historically, there has been a lack of quality top-end professional financial services content on the market to power this upskilling evolution: a gap that is only now being addressed, spurred on in part by the recognition that a post-Brexit world introduces a different range of investment risks and opportunities.
Dynamique offers financial industry performance risk solutions and retail investor CPD programs with offices in NZ and the UK.