By Græme Gordon, Executive Director, Praxity
I shouldn’t really be talking about Brexit. As those who have read my blogs before will know I tend to talk or discuss non-technical matters, and certainly stay away from politics. But the threats, or should I say, opportunities that Brexit may bring to Praxity member firms and their clients are too great to ignore.
Firstly, let me try to dispel a myth I have often heard outside of Britain, and even inside it, that Brexit will never happen! The British Government has been unequivocal in stating, “the democratic vote was to leave, so Britain will leave”.
Once we accept that Brexit will happen we should shift our attention to the challenge of turning around the threats so as to maximise the opportunities to our firms and clients.
So what are these threats?
Many are assuming that the apparent inaction of the UK Government and the EU/EC, and the calls by some UK citizens to reverse the decision, are reasons for doing nothing. This leads to a great initial opportunity. When Brexit happens it is, I believe, inevitable that the EU will have insisted that for trade to happen it needs to adhere to the EU’s four fundamental freedoms: the free movement of goods, services, labour and capital. I deliberately use the term ‘labour’ because the movement of labour is not only more restrictive than ‘people’ or’ citizens’, which is the present interpretation used for ‘open border’, but also is the actual interpretation in the EU treaty.
Given that these four fundamental freedoms are upheld in any trade deal, then the UK will still be an English speaking doorway to the EU. However, there will probably be issues on such taxes as VAT etc., so having a base in the EU may well still be highly sensible. If this is the case, now is the time to set one up in the country which provides the best fit for your firm. This could be English-speaking Ireland or centrally-located Belgium with its many English, French, Dutch and German speakers (most multilingual), or any one of the other 25 nations.
A significant number of those who were investing or considering investing in the UK before the vote, have either pulled out or frozen their investments due to the uncertainty of the Brexit future. The only exception being domestic property investment in London which has boomed due to the significantly weaker pound.
This is an ideal opportunity for investors with some risk appetite to find investments at very favourable prices. This includes not only companies but other tangible assets which some highly risk-adverse funds are trying to off-load.
There is also uncertainty in some quarters over the stability of the UK Government. This should be dispelled swiftly. A ‘Parliamentary Term Act’ exists in the UK which dictates that General Elections (for national government) will be held at regular five-year terms. Thus the present Government, which does hold a narrow but sufficient majority, can be fully expected to complete its term to May 2020. Additionally, in the present situation, even with the political climate of outsiders being elected, it is very unlikely that any other party in the UK could garner enough of the popular vote to form a Government.
The official process which will lead to Brexit will not start until the UK Government officially tells the European Commission that it wants “to enact Article 50 of the Lisbon Agreement”*. It is my belief that the UK Government will only trigger the mandatory two-year deadline which Article 50 dictates in late 2017, or more likely early 2018, so that the 2020 UK General election becomes a Brexit confirmation.
All of this means that firms, investors and such should be confident that their capital will remain safe.
The value of sterling
This may be the biggest opportunity of all. Why did the currency fall from about 1.55 a year ago to 1.29 against the US Dollar, and a similar percentage against the Euro? While the markets did factor in an allowance for a close vote, none, that I could see, factored in a vote to leave. This was a shock, and such a shock almost always leads to an overreaction, which is what I believe we saw here. The continued uncertainty and lack of understanding is still depressing the value of sterling and therein lies the opportunity.
If, like me, you believe that sterling is artificially depressed due to these uncertainties, then now is the time to get into sterling and sterling assets. It’s a case of the old but true ‘buy low, sell high’ adage. Sterling will climb, in fact it is showing signs of starting that now. So strike while you can.
*For further information, on Article 50 of the Lisbon Treaty, see Graeme’s article of July 06 2016:Article 50 of the Lisbon Treaty of the European Union; What is it and what does it portend?