The UK’s vote to leave the EU has certainly proved more than a storm in a teacup, but we believe there is a strong case for keeping calm and carrying on.
With plenty of negative headlines conjuring up fear and panic across the country, it is easy to get blindsided. However, we’ve drawn up a number of high level conclusions on Brexit to highlight that while life in the UK will feel a little uncomfortable for the next month or two, it’s certainly not all doom and gloom.
Uncertainty is the new certainty. This has been allayed slightly by the confirmation that Theresa May will become our new Prime Minister. But until she has delivered a clear plan for her leadership campaign, we will need to get used to uncertainty being the new normal.
UK risk is re-priced resulting in a short term shock. Given the uncertainty, it is entirely correct and logical that a higher discount rate is applied to UK assets and investment decisions. As a result, there should be an immediate step down in the value of commercial and residential real estate and marginal investment projects are likely to be shelved. It is probably sensible to assume a 5-10% decline in commercial and residential property prices over the next 12 months. But while uncomfortable in the short term, UK banks are fairly well capitalised so we do not expect this re-pricing to spill over into the wider economy causing extended financial distress. It does need to be watched closely over the next few months though.
A trade deal with the EU would be nice but not critical. The worst case scenario is that we cannot agree a trade deal and will simply have to deal under WTO rules. Tariffs into the EU are not onerous, and despite additional costs and customs bureaucracy to deal with, this is offset by a weaker currency: exporters are probably net winners in any Brexit scenario.
But what about financial services? Financial services are not covered under WTO rules and being out of the single market prevents the ‘passporting’ of financial services into the EU. This is rightly a major concern for the UK, particularly London, but our research suggests that adoption of MIFID 2 rules would actually allow access to EU markets without being part of the EU. Where this did not suffice, the opening of an off-shoot office in Dublin probably would. This needs further analysis but it is quite possible that not being part of the EU would not spell the end of London’s pre-eminence in financial services at all.
So when will things get better? Now that some strong political leadership has been installed, we expect the public to dust themselves off, realise that the world (and local) economy is still working and get back to a new-normal, which is the old-normal with a heightened level of uncertainty. Life in the UK will feel a little uncomfortable for the next month or two with plenty of negative headlines but we should “Keep Calm and Carry On”.