A vote for Brexit: Winners and losers

It’s just a couple of hours since we learned about the vote of the British people. Twelve hours ago, at around 4 AM, I listened to the BBC and heard that Leave was in the lead, a lead that solidified at approximately 4:40 AM. Already, it seems clear that there are way more losers than winners.

Frankfurt, Dublin and Paris are clearly among the winners of Thursday’s Brexit-vote. All three of them hope to benefit from the potential loss of passporting rights for banks based in the UK with which they were able to trade seamlessly in Continental Europe before. Part of the trades that went through the City of London might now be routed through another financial centre. Several ten thousand bankers will leave London and relocate to Frankfurt, Dublin or Paris. According to what banks said before the referendum, French institutes prefer Paris whereas American banks plan to opt for Dublin. German banks will move some of their operations to Frankfurt.

Frankfurt is not the only German city to benefit from the result. Berlin, the German capital, might rise out of London’s shadow and become a much more attractive location for European tech-firms. Not only are rents cheaper, also the overall cost of living is lower. Add to that that start-ups in Berlin will be able to continue hiring workers from all over the UK thanks to the freedom of labour movement. Should the UK revoke the European freedom of labour movement, London’s reputation as a tech-hub could take a significant hit. International investors might think twice before they put money into a British start-up.

Lawyers, tax experts and business consultants will also profit from the British exit-vote. It might take several years until the UK has successfully negotiated it’s exit from the EU which will lead to a period of continued uncertainty for firms in the UK but also in other countries. They thus need a lot of external advice which will keep lawyers and other service providers busy.

Bargain hunters will make some gains as well. Shares have weakened significantly, as has the Euro and the Pound Sterling. That provides buying opportunities for investors who are willing to take some risks. Also think of the gold price as a winner of the Brexit-vote. The precious metal has surged dramatically since the announcement earlier on Friday and is supposed to gain further, should there be political and economic disruption in the UK and in Continental Europe.

To mention some names, James Dyson, the legendary British inventor, as well as Lord Bamford (JCB) and Tim Martin, head of pub chain JD Wetherspoon, have all done quite well today. The three of them have been campaigning against the British EU-membership for years. For them, a dream has come true.

When we take a look at the losers of Thursday’s vote, the list becomes significantly longer. First and foremost, there is a German that might have to rethink his strategy: Carsten Kengeter, the head of the Deutsche Boerse in Frankfurt who was planning to merge with the London Stock Exchange Group (LSE). The headquarter of the new exchange was supposed to be in London which is now, after a vote for Brexit, put into serious question.

Another loser is the Pound Sterling. It has lost value, as has the Euro, the European currency. Not only does the overall British economy suffer but each and every Brit will be worse off thanks to the vote for Brexit. That’s not only because of the expected slowdown of the economy but also because of the weakening of the Pound Sterling against major international currencies such as the Dollar.

Somebody’s gain is somebody else’s loss, the saying goes. In the case of the Brexit-vote, London is obviously one of the big losers. The City of London, Europe’s leading financial hub, will shed between 70.000 and 100.000 jobs, PwC forecasts, and lose a share of the market to Continental European competitors. Add to that international companies that might relocate their European headquarters and you get an impression of why industry organisations such as the CBI think that the British economy could lose up to 950.000 jobs by 2020 thanks to a Brexit. The IMF and other international bodies have forecasted a British recession. That might affect the world economy – another loser – as well as the German economy.

For Germany, the Brexit-vote is a double-edged sword, precisely because of the chances of a recession in the UK. The country is a major trading partner for the German economy and auto manufacturers, machining companies and the chemical industry expect to make significantly less revenue in the UK. For the CEO’s of German subsidiaries in the UK, the Brexit-vote means that they will not get any new investments in the foreseeable future.

We aren’t finished yet. There are more losers around. One of them is the London housing market, so far an attractive safe haven for international investors and their money. According to some experts that I spoke to, this will change. London real estate will not be as hot as it used to. Don’t forget the FTSE. The British index is forecasted to shed another ten percent in the coming 12 months, UBS Wealth Management has stated.

Over time, there will be many losers, I guess. Let’s see whether I was right.

 

 

 

 

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What companies hate most pre-referendum day

Uncertainty. It is the keyword best describing the state of the British economy in the run-up to the referendum on the 23rd of June. With regards to GDP, the fact that companies don’t know whether they will soon find themselves outside the EU or not, has already taken its toll. In the first three months of this year, gross domestic product expanded only 0.4 percent, down from 0.6 percent at the end of 2015. Compared to the growth levels observed in 2014 and early 2015, that’s a significant reduction in growth.

Likewise, the amount of mergers and acquisitions has gone down (39 percent compared to the same time last year), as has foreign direct investment into the UK. Overall uncertainty has also left its mark on the real estate industry, one of the core pillars of the British economy, especially in London. Buyers have put their decisions for residential property on hold, as have tenants when renting commercial property. According to the Bank of England, mortgage approvals for house purchases fell back appreciably to an eleven-month low in April.

This is likely to continue, should there be a vote for Brexit: “A vote to leave the EU would be liable to see a marked hit to UK economic activity over the rest of this year and in 2017 amid heightened uncertainties, which would likely weigh down heavily on the housing market”, commented Howard Archer, Chief UK and Europe economist at IHS, a market research institute.

The latest victims of uncertainty are the stock market – the FTSE 100, the leading British index, shed 100 billion pounds in just four days – and the pound sterling which trades at eight week lows and is forecasted to decline further in the remaining days before the referendum.

“Wait and see” also seems the option of choice for employers. The labour market has slowed down, there are less new jobs being created. As the Morgan McKinley employment monitor shows, there were five percent less jobs available in the financial industry in London in May compared to April. “The performance of many institutions has not been encouraging”, said Hakan Enver, Operations Director at Morgan McKinley Financial Services. “We still see uncertainty due to the upcoming June referendum.”

Not surprisingly, the confidence of British firms is, according to the FT-ICSA Boardroom Bellwether survey, at a four year low. Only 12 percent are expecting an improvement over the next 12 months, down from 40 percent in December 2015 and 74 percent in July 2015.

Because of its nature, the uncertainty for businesses goes beyond their day to day activities. It remains to be seen whether we will really know much more on the 24th, as a vote for Brexit would trigger a long and difficult phase of renegotiations. Thus, the much hated uncertainty may last way longer than companies might want to think. “With a vote for Brexit, the outlook remains unsure”, John Hammond, a partner at CMS Hasche Sigle, told me on Friday. “There will be more wait and see, companies will delay their decision making even further.”

Both British and German firms have been feeling the effects of uncertainty for a couple of months. Nevertheless, many businesses are not prepared for the impact of a Brexit-vote, with the exception of the financial industry. As the FT found out earlier this week, only a few businesses have taken adequate precautions to prepare for a British exit from the EU, despite the fact that the polls are suggesting a very tight race. Several polls now see the Leave-camp ahead, in some cases with a margin of seven or even ten percentage points.

This lack of seriousness when thinking about Brexit is also indicated by a recent study by the Global Counsel that stated that just over a quarter of FTSE 100 firms identify it as a concern for their performance in 2016. John Hammond, the lawyer at CMS Hasche Sigle, sees his German clients only now waking up to the possible reality of a Brexit vote: “I am telling people that their previous attitude – Brexit will not happen because it does not make economic sense – is complacent”, he said. “German companies are not particularly well prepared.”

The same goes, I fear, for a majority of not only British but also French, Dutch and Belgian companies. At the same time, some of Hammond’s clients chose the other extreme: “Some have been asking whether they can still sign contracts under British law or whether they should wait”, recounted the lawyer.

Ironically, his profession might actually be one of the few winners after a vote for Brexit, during an extended period of uncertainty. Lawyers, management consultants and tax experts are expected to see a surge in demand for their services, as companies struggle to cope with the levels of uncertainty.

But, at least John Hammond would be happy to forgo that business: “It’s not what I would hope for”, he said with a grave tone. “I would not want to benefit from a Brexit.” Unfortunately, there are others, especially on the politics side of things, that don’t have this issue but that will be quite happy to benefit from vote for Brexit.