Brexit Control - Dawn of a New UK?

01/07/2016 16:55

The moment I became aware of what was unfolding from the time my alarm went off at 5am on the Friday morning following the referendum I was struck with fear and anxiety of the unknown that lay ahead. By then voting had reached the point of no return and we were heading for the exit. I made my way to the West End of London to meet two friends for breakfast and we struggled to interpret what had just happened. One friend works in commercial property for a French bank. The other runs a UK business based in the Midlands and was one of the signatories of the letter many business leaders put their name to saying we should vote Remain. As we ate our Full English breakfasts we were trying to predict what this meant. My commercial property friend said that in the run up to the referendum some 75% of the bank's UK commercial property deals were done with foreigners and he could see this only increasing with the resultant weakness of sterling, whilst the other was a little more unsure about what it meant for his business where his main market is the UK, but he also exports to the US and EU, however the fall in sterling was unlikely to make his product any more attractive to his customers abroad. So two experts in their fields were pretty certain of two outcomes from Brexit, namely higher property prices and no boon to exports, contrary to what the Leave campaign were trying to get voters to believe.

Now this was only three people having a knee-jerk discussion about the prospects for the UK economy following the Brexit vote, but I came to learn very quickly that straw polls like this really matter. Only a couple of weeks before the vote I was meeting with a handful of contacts in the City and all of them said they were voting Leave (and yes we are still on speaking terms!). Driving up and down the country on major motorways also indicated that the farmer vote was going the way of Brexit given the large amount of signs there were saying "Vote Leave". This was an interesting observation as it was expected that the farmer vote was a shoo-in for Remain, however another farming friend said that the industry, despite receiving generous subsidies from the EU, had become disenfranchised with the whole project due to the endless rules and regulations that kept on changing every few years.

There's no question business has been impacted, just as it was ahead of the vote due to the uncertainty. Even Sir Richard Branson has mothballed investments that will impact the UK economy and as it's unclear as to what the future holds for various deals, unquestionably the vote will cause a slowdown in growth. At least there is evidence that existing business remains active and optimistic, taking the view that what's done is done and we have to deal with the cards we are dealt as best we can, in the truly stoic and British way that we go about things. It has been interesting to gauge the opinions of other people in the City since the vote. I have spoken to a number of non-UK nationals who have offices based here due to it being a very significant financial centre and because of all the passporting benefits that come with EU membership. On the whole they do not foresee resultant changes to passporting rules impacting business significantly and if it did mean opening another office in Paris or Frankfurt to regain full access to the single market, so be it. Also interestingly from a regulatory point of view we already have a well-established regime under the UK's Financial Conduct Authority and those rules out of Europe that financial services currently have to abide by are unlikely to change significantly, with the overwhelming drive for all regulators being to protect customers.

However, the Leave campaign's claim to be able to take back control is going to be sorely tested in the coming months and years with the thorny immigration issue unlikely to go away. Non-UK citizens will still want to live and work in this country and it will need labour from outside where skill shortages exist. What it seems that many Leave voters didn't appreciate is that the Leave campaign refused to put a figure on net migration as they knew only too well that it's a target that's impossible to set, especially given they want to have as much access to the EU's single market as possible, which means free movement of labour.

So accessing the single market means free movement of people, just as Norway, Switzerland and (dare I say it?) Iceland have to accept, which also means contributing to the EU coffers, as well as compliance with various EU rules. So depending on how Brexit negotiations go, we are likely to have less access to the single market and absolutely no influence over the setting of the rules by which we'll have to abide in order to have this second rate access. Evidence suggests that Leave voters' main motivation was not immigration, but having greater control over law making*, so new arrangements with the EU will also disappoint on this front given that in the future the UK is likely to have to comply with many EU regulations.

The next cornerstone in the Brexit saga is invoking of Article 50, if indeed it is even invoked at all. At the time of writing the probability of Article 50 being triggered in 2016 is at around 40%**, so there are markets being made that show there is a large degree of uncertainty as to when the next Prime Minister will formally inform the EU of the UK's intention to leave.

The biggest problem of all is that no one has any answers and Brexit throws up more questions than it solves. Strong words are already being used with EU leaders saying we cannot cherry pick the deal with want and French President Hollande going a step further by calling for an end to the UK clearing euro-denominated trades. This means businesses not just in the City but across the UK, are having to feel in the dark. A new UK maybe about to dawn, but whether it'll be good for our pockets and our country's future is still yet to be seen. A key element to our success will be to remain optimistic about that dawn when it arrives.

* Source: Lord Ashcroft polls
** Source: Betfair Exchange "UK - Article 50 triggered in 2016?" market

This article does not contain and should not be construed as containing, investment advice or an investment recommendation or an offer of or solicitation for any transactions in financial instruments. Any opinions made may be personal to the author and may not reflect the opinions of my employer.