BREXIT - A Silver Lining?

DISCLAIMER: It is important to note that I am by no means endorsing Brexit. The response of the financial markets this morning speak for themselves. The point of this article is to try and dispel some of the blind panic and to focus on the future. 

Edit: The content of this article does not necessarily reflect the views of JP Morgan Chase & Co.

In what seems to be almost a dystopian reality, Britain has voted to leave the European Union. As predicted, the Pound has plummeted, a political crisis looms and the FTSE 100, at the time of writing, is expected to drop by 8.8%.

As can be expected, the international media has responded as if all hell has broken loose. Whilst there can be no doubt that the short-term effects over the next few months will be severe, the future is perhaps not as dark as some would make out.

With Britain as the 5th largest economy in the world, the European Union is almost as reliant on Britain as a trading partner as Britain is on the EU. Therefore, the notion that France and Germany can ‘punish’ Britain by impeding access to the single market (as some commentators have suggested may happen) is ludicrous. As Stephen Kinnock, the Labour MP for Aberavon noted before the referendum; ‘If the British people voted to leave the EU that’s one thing…but can we really say that they voted for the devastation and destruction of the entire exporting sector of our economy? I don’t think you can necessarily say that there’s a democratic mandate for that’.

The same can be said of the French and German economies, not to mention the EU’s economy as a whole. No right-thinking government would damage its own country’s economy out of spite for an ally and trading partner. Furthermore, as Neil Woodford (an ￡8bn fund manager) has noted; ‘even if exports to Europe did suffer, those losses could be offset over the long term by greater opportunities to boost trade with non-European countries’. As the Leave Campaign consistently noted, one of the conditions of Britain’s EU membership is/was that it cannot negotiate trade deals with other countries – everything has/had to go through the EU. In fact, a report published by Woodford Funds found that it was highly probable that leaving the EU will ‘leave the external sector better off in the long run’ should Britain use its newfound freedom to negotiate its own trade agreements to good effect.

Of more controversy is the effect that this ‘Brexit’ will have on financial services, an area of personal concern considering my career. Whilst the forecast for financial services post-Brexit is certainly more gloomy than for other industries, all is not lost. Whilst it is true that even in a best-case scenario, Britain would still lose influence over the single market’s rules governing financial services, it has been suggested that any shortfall could be made up abroad. The Woodford report, for example, argues that ‘the potential for greater UK financial services exports outside the EU could be particularly high – especially to places like Hong Kong and China, which account for just 2 per cent of the UK’s total financial services exports, and with which the EU does not currently have a trade deal’. Furthermore, Richard Stone of the Share Centre has dismissed the idea that considerable financial talent may be poached from London to Europe, as some European ministers have suggested. The City of London, argues Stone, has ‘massive advantages around time zone, language and expertise that are not going to disappear’.

Whilst there can be no doubt that this vote has changed the course of British history forever, the catastrophizing that has accompanied the result of this referendum is both unhelpful and, one must hope, unrealistic. 

By @CDWoodcock