Institutional investors face growing concerns about Brexit impact

15 August 2016 Consultancy.uk

The effects of a Brexit are starting to make themselves felt, with a political implosion, the collapse of the sterling and lingering uncertainty for businesses on both sides of the channel. A recent survey reveals that institutional investors are facing growing concerns about the potential economic consequences on the UK and Europe’s mainland.

The referendum results sent shock waves through the UK and global markets, dragged the pound to its lowest level since the 1980s and caused considerable consternation among the UK’s young people. Politically, the event has so far seen the end to a number of political ambitions, and the rise of a new prime minister.

For many businesses, the event has, in a certain sense, only just begun. Considerable uncertainty looms, according to a study conducted by FTI Consulting, among 100 global institutional investors with more than $8 trillion in assets under management. The overarching outcome is clear: negative consequences for both the UK and the EU are feared.

Economic impact on UK post Brexit

Institutional consequences
The impact of UK’s leave vote is expected to be substantial for a range of key economic and financial phenomena. The outlook, following the triggering of article 50, would, according to 50% of respondents, see a slight decrease in the value of the pound versus the dollar, while 35% say it would decrease substantially. The UK’s trade with the EU is also likely to suffer, with 57% seeing a slight decrease while 20% expect a substantial decrease. The UK’s economy is also expected to undergo a slight contraction, according to 61% of respondents, while 17% expect a substantial contraction. 

The respondents also believe that one of the consequences will be an increase in inflation – 59% cite a slight increase and 13% a substantial increase. One positive note is that UK trade outside of the EU is set to increase, according to 41% slightly and by 17% substantially.

Brexit impact on EU countries

One of the issues that received little attention during the debate is the negative effect that the UK leaving may have on its former European partners. France, according to the respondents, will take the biggest hit: 71% believe that the decision harms the country economically, while 9% only believes it will in the long run benefit the country. Germany too takes a hit, 64% believe it will be harmed by the move, relative to 16% that say that there will be an improvement.

Spain, Italy, Greece, Ireland, Portugal, Poland, Belgium and Sweden all take relatively significant hits. 56% of respondents believe that none of the EU countries are benefitted by the UK leaving.

Likelihood of Post Brexit Events

The research also considered the investors’ opinion on the likelihood of a range of post Brexit events. 96% believes that the government will take steps towards leaving, with 89% of those respondents are monitoring the situation. 85% also believe there will be a new round of Quantitative Easing (QE) from the Bank of England (which to an extent already has been triggered), with 72% monitoring the situation. 55% of respondents think that the EU will punish the UK, should they enforce the decision – 40% believe this is unlikely.

The majority (53%) of the respondents are not confident that the UK will retain access to the single market – 38% believe that access will be retained, while 9% don’t know. 49% of respondents also believe that companies will depart from the UK to Europe’s mainland, while 60% believe that the low sterling will see a rise in the number of M&A deals. Interestingly, two thirds of respondents believe that the UK would retain its financial centre status, despite all the warnings sent by large banks and insurers that they are reconsidering where they should be headquartered in Europe.  

Likelihood of UK leaving EU

FTI’s survey further asked respondents whether they think that the government should trigger article 50, and leave the EU, following the non-binding referendum outcome. 34% of respondents would rather see the government try to renegotiate its EU membership terms, while 17% say that the government should ‘delay the processes at each opportunity to maintain the present membership’. Latest insights in the political arena reveal that the UK may be aiming for the latter tactic, with 2019 rumoured to be the year in which the UK will formally leave the EU. 7% of the respondents say they don’t know. 

“The results indicate grave concerns regarding Brexit’s implications for the UK and EU economies in particular,” reflects Edward J. Reilly, Chief Executive Officer of the Strategic Communications practice of FTI Consulting. “This will be a continually evolving process, with many uncertainties and complexities that have wide-spread impact on capital markets activity, corporate business decisions and the political discourse across numerous jurisdictions. We are counselling our clients to remain engaged, stay updated on the current state of play and to be nimble in adjusting to changing market forces.”

Effects on portfolio over next 12 month

Other major events
While a Brexit has global consequences, a number of other events taking place may too have worrying consequences. The top concern is the US election, cited by 53% as likely a concern for their portfolio. Donald Trump winning the election in the US is seen as likely and concerning by 27% of respondents, likely but not concerning by 11%, and unlikely but concerning by 49%.

Another major fear is a recession in the UK, cited by 51% as likely and concerning and by 16% as likely but not concerning. UK banks not having access to EU is cited by 47% of respondents at likely and 65% of respondents as concerning. A general election in the UK is seen as likely by 62% of respondents, although only 48% see it as a concern.

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