Britain’s vote to exit the European Union in a historic referendum on 23 June has sent global financial markets into a state of flux. The pound has slumped and gold has surged. PBI rounds up the initial reactions and market forecasts from the financial services industry experts
Britain’s vote to exit the European Union in a historic referendum on 23 June has sent global financial markets into a state of flux.
The Brexit camp won with almost 52% of the votes, while the rival Remain camp secured 48% of votes.
Majority of England outside London and Wales strongly supported Brexit, while London, Scotland and Northern Ireland backed staying in the EU. The decision would make Britain the first country to leave the 28-nation bloc after 43 years.
Following the Brexit, the pound slumped more than 10% against the dollar, which is its lowest levels since 1985, Asian stocks tumbled and US Treasuries and gold surged.
The Brexit vote could significantly impact the future of jobs in the UK.. Earlier this month, major US lenders including Citigroup and JPMorgan warned of moving operations from Britain and shedding a number of jobs in the event of a Brexit.
In a statement, the Bank of England said that it would "take all necessary steps to meet its responsibilities for monetary and financial stability."
Ian Powell, Chairman and Senior Partner of PwC, said the UK’s decision to leave the EU will have "significant implications for businesses". He added that due to the uncertainty over the coming months, business confidence may be impacted.
Bill O’Neill, Head of the UK Investment Office at UBS Wealth Management, said: "A confrontational, vexatious transition could see the UK courting a recession in 2017. We would expect a prolonged period of uncertainty and consumers will very quickly sense the challenges out there. The Bank of England will be under pressure to cut interest rates and/or reintroduce quantitative easing."
Economists at Julius Baer have said that the relationship between UK and European equities must not be underestimated either and the discussions about a breakup in the Eurozone could soon be re-fuelled as well.
Effective communication with clients is crucial
Mark Pugh, UK asset management leader at PwC, said that a key immediate concern for asset managers, particularly, will be the management of market volatility – the natural companion of political and economic uncertainty.
"For asset managers, the concern is particularly pressing as it impacts the value of the very product itself. Some listed UK asset managers will be worried about the combined impact of volatility on their own share price alongside the impact on the value of the assets in their funds.
"Hand in hand with this will be liquidity concerns for funds, especially if there is a run of outflows over a long period of time with no market correction. Regulators have been focused on liquidity risk for some time and the asset management industry should already have stress tested for this outcome but those who prove unequal to the task can expect scrutiny."
Communication with clients is crucial at this time, said Pugh, as many customers will not know how to respond. "Many asset managers have set up dedicated helplines and call centres to provide information to assist investors make informed decisions," he added.
Claus Nielsen, Head of Markets at Saxo Bank agreed saying that it is it important to take prudent measures to reduce clients’ exposure to risk and to be fully transparent as well as educate customers on the range of options available.
Strategic negotiations over financial services critical; complexities forecasted
The leave vote will not immediately pull Britain from the EU membership. The exit process is expected to take a minimum of two years.
The negotiations over financial services promise to be long and difficult as they are strategic for both the UK and the EU, say Philippe Ithurbide, global head of research, strategy and analysis – Amundi and Didier Borowski, head of macroconomics at Amundi.
"The UK is the EU’s leading financial centre: it accounts for almost 25% of the EU’s financial services and 40% of its financial service exports. Financial services represent 8% of UK GDP. Although no financial market is likely to replace London, the loss of a "European passport" for UK banks is likely to lead to the relocation of certain business segments (to Ireland or certain EU markets).
"The UK’s services trade surplus (5% of GDP) could therefore plunge in the future, making funding the external deficit, which is at an all-time high (-5% of GDP on average over the past two years), complicated," say Ithurbide and Borowski.
Giles Williams, Financial Services partner at KPMG in the UK, adds: "The Financial Services industry needs to quickly develop its ‘asks’ of politicians to make sure that financial services can continue to play its crucial role in the wider economy. It is critical that the negotiating teams fully understand the implications and consequences of dislocating European capital markets, banking, insurance and asset management on the economy both here in the UK and in Europe."
The Investment Association’s statement said that focus in the short-term will be on how markets respond, but it is important that we adopt a collective long-term focus on how the UK can preserve the pre-eminence of its financial services sector including our highly successful £5.5trn asset management industry – the second largest industry of its kind in the world.
Not all doom and gloom for investors
Richard Potts, partner at Irwin Mitchell Asset Management, has said, however, that the big fall in the FTSE 100 will probably present good buying opportunities for investors and benefit those companies with large overseas earnings. "As many of these companies are large and overseas earnings represent a significant proportion of companies in the FTSE, this boost to earnings could attract buyers."
Dean Turner, Economist at UBS Wealth Management says "we should not be too fatalistic, as there are many areas of strength in the global economy that will help to stabilise the situation".
"The days ahead will likely be challenging for investors to navigate, but maintaining a global portfolio diversified across regions and assets is the best way to shelter from the biggest pitfalls, and gain exposure to the greatest opportunities.
"Low inflation meanwhile offers central banks the scope to respond aggressively if need be. In particular, the US economy is unlikely to be derailed. In Europe, after a strong performance in the first quarter, the foundations are in place for expansion to continue in the face of any disruptions caused by the UK’s decision. And in Asia, the ongoing stabilisation of the Chinese economy should continue to support activity across the region."