In part one of this series we looked at two key questions in the Brexit debate: exit from what? and, economically, would we be better off staying in or coming out? If you missed it, you can catch up here.
In this blog, we will build on a key finding in part one, where we discovered that the UK is particularly reliant on foreign investors to fund investment in the UK. So what? Who would be affected?
On a lighter note, we will also be taking a trip to the bookies to see whether the hot money is backing the ‘Brin’ or the ‘Brexit’ horse and finish off with a timetable as we countdown towards Referendum Day.
Please note: Equilibrium is running a poll on views on the Brexit vote. If you would like to take part, please click here.
Firstly, we know the UK is reliant on foreign investment but does this matter? Who does it affect?
Just as a reminder, foreign direct investment (FDI) is money that is spent by overseas companies, governments and individuals on assets in the UK. The UK is one of the top destinations for FDI within Europe and globally. In total, nearly half of all of this country’s FDI comes from other EU members.
The doughnut chart below shows the direct answer to this question. Financial services are by far the biggest beneficiary of this investment across all the industrial sectors in the UK. They account for around half of the total inward investment into the country:-
Not only is this figure high but it has been growing rapidly over recent years; and over the last two years it has nearly tripled. Financial services employ over one million people – two-thirds of them outside London - and contribute £30 billion in employment taxes and raise another £23 billion in other taxes such as bank levies, corporate taxes and insurance premium tax.
In fact, as a proportion of our overall economy, financial services is one of the largest and fastest-growing sectors and represents a much larger proportion of our economy when compared to the other EU members or that of other developed nations (members of the Organisation for Economic Co-operation and Development, or OECD):-
In addition to relying on inward investment, UK financial services are also dependent on the EU as its customer base. Around 41% of the UK financial services revenues are derived from the EU, providing the UK with around £16bn trade surplus per annum.
Don’t bank on it
Thus, an important consideration in any decision regarding membership will be the impact on this important sector of the economy. Brexit may mean that UK-based banks and other financial firms could lose cross-border access to European markets and may be forced to set up new subsidiaries on the continent which would substantially increase costs. This also risks companies relocating, thereby costing the UK employment and tax revenues.
Non-EU banks, such as the Chinese banks that are looking to trade the renminbi in London, may also consider shifting to Continental Europe. The UK is the world’s global leader in foreign exchange and derivatives trading, and is the largest centre for cross-border bank lending. The UK would have a lot to lose if the European financial centre of gravity started moving towards Paris, Amsterdam or Frankfurt.
Bear in mind that half of the world’s largest financial firms – ranging from commercial and investment banks to insurers, asset managers and hedge funds – have their European headquarters in the UK. In 2014, nearly 250 foreign banks were operating in the UK, around 170 of which were based outside Europe and accounted for 30% of banking assets in the UK. Non-UK EU banks accounted for around 16% of overall banking assets.
Another important element of financial services is the insurance market, where the UK is number three after the US and Japan. Foreign firms account for around two-thirds of the insurance premiums bought in the London Market, with around 90% of premiums insuring risks located outside the UK.
The consequences for the financial services sector are a major consideration in this debate.
On top of any direct impact, any shrinkage in financial services is bound to have knock-on effects on the broader professional services sector including legal, regulatory and administrative services.
Don’t bet on it
Moving away from serious money matters to something with a bit more entertainment value, let us have a look at what the bookies are telling us.
We entitled this section ‘don’t bet on it’ because this data source provided little in the way of prescient guidance ahead of the convincing win by the Conservatives at the General Election in May, but let’s paint over this small detail.
Currently, the odds look like this:-
To stay in the EU 7/4
To exit the EU 4/7
Source: Oddschecker.com. (This is an average of 11 bookies’ quotes)
What this tells you is that the ‘hot money’ is saying there is a greater chance that Britain stays in the EU than exits. A £10 bet on ‘to leave’ could win you £27.50, whereas a £10 bet ‘to stay’ could return a less fruitful £15.70.
Clearly, as wealth managers, we are not necessarily sure whether you should (or should not) be frittering away your money in this manner but we will keep you posted as to changes in this unreliable barometer as we go forward.
In our next ‘Brin or Brexit’ blog, we will look at those UK industries that may be affected if we leave and trade tariffs are re-instated. In addition, we will look at regulation: this week 19 European countries called for cuts to EU regulations – what are the costs and benefits of this red-tape?
Nov 2015 UK PM David Cameron submitted reform proposals to the European Council
Dec 17 – 18 UK reform proposals to be discussed by the European Council
Feb 2016 End of negotiations between EU and UK
Mar 2016 British government to set date for referendum
The content contained in this blog represents the opinions of Equilibrium investment management team. The commentary in this blog in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader.