Two years ago, the UK voted to leave the European Union after holding a referendum that favoured its withdrawal. UK's Prime Minister, Theresa May, announced the implementation of the Article 50 by the end of the first quarter of 2017. The UK expects to cease being a member of the European Union by the end of March 2019. The announcement of the move elicited different reactions across the globe, the most evident being panic among investors. The value of the Sterling pound plummeted immediately as investors sought to leave the UK’s murky environment. Also, UK equities reduced and inflation was believed to increase by 2%. Other investors expressed their intention to move to Frankfurt. Experts believe there is a silver lining out of this situation in the long-term; but is there? The following discussion looks at the effects of Brexit on the UK economy, and the risks and opportunities for investors.
Brexit has created a tentative environment for investors where nobody can predict with certainty what will happen. Any expert will tell you that indecision is not favourable in the financial markets because it causes investors to adopt a wait and see strategy. Uncertainty affects the stock and the foreign exchange markets as the currency pairs continue to fluctuate. Here are critical factors that would affect the performance of any venture that an investor intends to undertake.
Since Brexit was announced, the pound has been weakening against the US dollar. Experts predict that the pound will grow even weaker given the ongoing Brexit negotiations.
The markets have become pretty volatile, which has caused the prices of stocks and currencies to change erratically. Also, the slightest of comments by a state official are causing significant drops in the UK currency and stock prices. It has made investing pretty tricky.
The Bank of England increased the interest rates in November 2017. It has been over a decade since the Bank imposed a higher interest rate. And, with a stagnant wage growth rate, the country should expect more increases before the end of 2020 to keep inflation at the targeted 2% increase.
Brexit is a political issue, and like any other upheaval, it is likely to affect investments negatively. Although the talks have gained a stronger footing, Brexit will cause the value of any investment to drop.
The Brexit announcement had sent the economy to a frenzy with the country being ranked as the worst performing in the G7. Previously, it was among the best-performing (before the referendum). Households are taking the greatest brunt with the increasing costs of living. A weakening pound means more expensive imports while inflation will increase the price of products in the short run. Business investments have also plunged since 2017, and the Bank of England expects that there will be 25% fewer investments by the end of 2019. This is detrimental to the country's future growth and productivity. Here's a breakdown of the effects of Brexit on several industries and how it affects an investor's decision.
The banking sector is hardest hit as banking and finance firms relocate to other countries. EY confirmed a third of the City firms were set to move in 2017 with vocal banks like Goldman Sachs leading the way. Goldman has employed more than 6,000 people in London. Further, the European Union announced its decision to move the European Banking Authority from London to Paris after several member states voted to host the regulator. As a result, shares in British banks have dramatically reduced in value, causing loans to surge and banking revenues to drop. The Royal Bank of Scotland, Lloyds and Barclays banks reported share price drops of more than 30%. Regulators have urged banks to restructure their operations if they are to continue running their businesses.
UK's automotive industry has been reporting gains over the last decade, producing up to 1.6 million vehicles annually. 77% are exported abroad and 58% of the buyers comprise EU countries. If Brexit laws are implemented, the automotive industry stands to lose as they restrict free movement of labour. The UK is also bound to lose access to the largest market (EU member states). Toyota, for example, set base in the UK due to the availability of a secure network of vendors and availability of skilled labour. The manufacturer announced that no-deal Brexit would lead additional tariffs that cost as much as one billion pounds and it would move some of its production work to another country.
Brexit raised concerns over UK's status as a tech capital and its attractiveness to investors. The most notable effect will be the country's inability to serve European clients after March 2019. Besides, EU workers are now less willing to relocate hence, recruitment may not offer a viable solution to this problem. While major companies are endorsing London as the largest tech hub, persons looking to invest in this sector should be cautious.
Issues have been raised concerning the regulation of this sector as departure from the EU will make Britain less desirable for development and investment. Usually, the European Medicines Agency is in charge of centralised authorisation of drugs valid in EU member states. As a result, some drugs receive early approval and rapid access to the medicines. Brexit may also threaten research projects launched for new drugs, which will further slow down investment in this industry. The situation was worsened by EU's move to award Netherlands the right to host European Medicines Agency, which has been based in London.
Major companies in the industry began to reduce in size, and others have closed down after the announcement; a process that has been referred to shink-flation (a situation where prices are the same as production reduces). Items like Haribo and Cadbury's Freddo bars have become more expensive due to the weakening pound. Reports show the rising cost of imports has put 14,800 restaurants at risk of going bust as other food outlets declare insolvency.
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