Investors regroup as Brexit challenge looms

Local and foreign investors active across the UK will have to come to terms with the country’s future outside the European Union as Brexit eventually became a reality thanks to the referendum held on June 23.

Prime Minister David Cameron has announced he will step down within the next three months.

“Many businesses will be concerned and need time to assess the implications,” the Confederation of British Industry, the UK’s largest business association, wrote in a note on June 24. “But they are used to dealing with challenge and change and we should be confident they will adapt.”

More than 17.4 million people voted Leave in the referendum, ensuring a 52% overall majority over the 48% of votes for the Remain camp. As soon as the results became official, Prime Minister David Cameron, the face of the Remain platform, stated that the country “requires fresh leadership” to steer the country outside the EU first, and eventually reposition it in the global trade arena.

“We should aim to have a new prime minister in place by the start of the Conservative party conference in October,” he said. 

Slow process

Any new government will have to set in motion the so-called Article 50 procedure of the Lisbon Treaty, which gives the UK up to two years to finalise its withdrawal from the EU and redefine trade relationships the 27 members.

“There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold,” Bank of England governor Mark Carney said in a televised statement. “And it will take some time for the UK to establish new relationships with Europe and the rest of the world.”

The surprise outcome led to the FTSE-100 opening down by 8% on June 24, and every other major European stock market reeling. Meanwhile, the pound fell by more than 10% against the US dollar as the cross-rate hit $1.33, its lowest level since 1985, in early morning trading on June 24.

“Brexiters” played down the meaningfulness of the markets’ initial reaction.

“Markets always overreact,” Gerard Lyons, one of the leading figures of the Economists for Brexit group and former economic advisor of Boris Johnson, told fDi. “It’s a very positive result for the UK economy and despite the initial negative reaction from financial markets one should take a positive long-term view. The economy will receive a boost from the weaker pound and continuous low interest rates. Foreign investors need to look through the near-term political and financial market uncertainties and look at the longer term fundamentals of the UK that remain very attractive.”

Long-term picture

It is clear however that the country’s long-term appeal to foreign as well as domestic investors will depend on the outcome of the Article 50 negotiations and the new trade agreements the country will agree with its commercial partners across the globe, as representatives of the business community across the country have been stressing throughout the campaign.

“Our hi-tech economy works on a global basis and we are going to need the new trade deals to be negotiated sooner rather than later,” John Forkin, managing director of Marketing Derby, a local investment promotion agency (IPA), told fDI. “Our strategy will continue as we have the original equipment manufacturer industry and the workforce to attract investment.”

Rolls-Royce, Derby’s number one employer and one of the largest UK manufacturing groups, reiterated it will “remain committed to the UK”, but also that “the medium- and long-term effect will depend upon the relationships that are established between the UK, the EU and the rest of the world over the coming years,” local media reported CEO Warren East saying on the morning of June 24.

Manufacturers respond

Foreign manufacturers also issued cautious statements.

“While it is clear there will now be a period of uncertainty, there will be no immediate change to our operations in the UK,” German press reported BMW, a major car manufactured in the UK, as saying in a statement. On the other hand, India’s Tata Group, which operates in the UK through 19 independent subsidiaries, has confirmed it is already reviewing its UK strategy, Indian press reported.

In the meantime, some overseas financial groups active in the City of London, which have largely benefitted from the European common market in the past, have not hidden their concerns.

“We cannot help but feel disappointed at the outcome of the UK referendum on membership of the EU,” John Cryan, CEO of Deutsche Bank, said in a statement.

“We currently do not believe significant changes will be required to our current UK structure or business model in the short term as a result of the referendum. Along with the rest of the industry, we will monitor the UK’s negotiations with the EU closely. If any changes are required, they will be carried out in a way that minimises any impact on clients and employees.”

The London School of Economics estimated that FDI inflows between two countries often jumps by an average 28% when either the sender or the recipient joins the EU, whereas joining alternative trade agreements like the European Free Trade Association is not a good substitute for full EU membership in terms of FDI appeal, according to a paper published in April 2016.