By Simon Black, CEO, PPRO Group
If we suddenly learnt that the world would end tomorrow, someone would make money from the discovery. At very least, to quote Tom Lehrer[1], Lloyds of London would be loaded when they go.
No matter what happens, someone somewhere finds a way to turn a profit. The trick is, being that someone. With Brexit, so much focus has been on the negatives that we think that there’s a danger that opportunities will be missed.
Here’s our guide to having a good Brexit.
E-commerce and cross-border lead generation
The exchange-rate for sterling has fallen so low, that the pound is almost at parity with the euro. For cross-border e-shoppers from the rest of the EU, that turns Britain into a massive bargain store.
With even a minimal effort at promotion, UK merchants can attract price-conscious EU consumers. In fact, UK SMEs saw their international sales rise by an incredible 34% in the last six months of 2016, three times the increase in the first half of the year[2], due to the exchange rate. If ever there was a time to feature the Union Jack accompanied by the words (suitably localised) ‘Brexit bargains’, in your promotions, it’s now.
That’s great, as far as it goes. Everyone wants extra trade even if we’re effectively selling at a discount. But it’s not sustainable and its continuation cannot, in any case, be taken for granted. At some point the pound will rebound or bargain hunters will revert to their previous shopping habits.
So, what to do?
Turn today’s cross-border bargain hunters into loyal repeat shoppers. Invest now in data collection, strategic planning and customer-experience improvements. Use the data you gather on your new customers to engage them and migrate them to localised version of your site. For now, keep them coming back with price-led promotions but over the next year, try to deepen customer relationship, learn their other purchase motivators and give them reasons other than price to keep coming back.
There is no sign of the Eurozone recovery slowing down; in fact, it’s quite the opposite, with the Eurozone economy growing twice as fast as the UK in recent months[3]. And there are already signs, particularly from the automotive sector, that this is releasing pent-up demand. In theory, there’s no reason why UK retailers can’t benefit by servicing this pent-up demand. Successfully doing so — particularly in the face of, for instance, uncertainty over customs arrangements after Brexit — is going to take nerve, commitment, and impeccable customer focus. But it is possible.
FinTech, the City, and a country that loves to borrow, spend, and invest
Brexit threatens a sizable chunk of the UK financial-services industry. Much of the business conducted by UK financial services, most obviously the Euro-clearing markets, relies on access to EU markets. That’s a fact. We can’t wish it away.
But neither Brexit nor the EU are everything. To take a couple of examples, London trades nearly twice as much foreign currency as New York[4], its nearest rival. This trade does not depend on EU markets. Around 60% of the world’s Eurobonds are traded in London[5]. Despite the name, these have nothing to do with the EU and the trade is not fundamentally threatened by Brexit. Similarly, the £60 billion-a-year London market for commercial insurance draws a third of its clients from North America, a third from the UK and Ireland, and a third from the rest of the world put together, including the EU[6].
The UK FinTech scene has the world’s biggest financial centre at its disposal. And if Brexit threatens to erect barriers that will hinder UK firms trading on the continent, the same is true in reverse. UK FinTech s will enjoy privileged access, in geographical and regulatory terms, to the enormous b2b market that the City of London gives them access to.
They will also have privileged access to the UK’s highly competitive retail finance market, worth £58 - £67 billion a year[7]. And there are signs that leaving the EU could help invigorate at least some segments of that market. A recent article in the FT[8] — not by any means a Brexit cheerleader — reported that small-to-medium UK providers of retail banking services are actively looking forward to Brexit in the hope that it will free them from onerous EU regulations designed for huge ‘too large to fail’ banks but now applied to all financial institutions, even smaller ones.
Taken together — along with the ready availability of investment for FinTech start-ups in London, and the UK’s sympathetic regulatory environment — these facts clearly signpost a potential future for the UK as a global B2B and B2C FinTech incubator.
But this won’t happen by itself. Right now, we’re still faced with the threat of a FinTech exodus. To make sure the UK’s FinTech motor doesn’t stall, the British government must work out a transition deal with the EU27 that gives London-based FinTech firms an incentive to keep at least some of their businesses here for long enough to see what opportunities Brexit and a post-Brexit UK could bring.
And as an industry, we need to lobby as hard for that transition as we have for a PSD2 that’s fit for purpose. Recognising that there are profound risks associated with Brexit does not stop us also looking for opportunity in it. Why should it? For as long as the world hasn’t ended, there is still business to be done.
Website: https://www.ppro.com/
[1] https://www.youtube.com/watch?v=frAEmhqdLFs
[2] https://www.paypal.com/stories/uk/open-for-business-paypal-reveals-online-exports-boom?categoryId=company-news
[3] http://ec.europa.eu/eurostat/documents/2995521/8122505/2-01082017-AP-EN.pdf/940abad8-436d-4758-b9d2-2156173a2c77
[5] https://www.lseg.com/sites/default/files/content/documents/20170105%20Dim%20Sum%20Bond%20Presentation_0.pdf
[7] http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/587384/IPOL_BRI(2016)587384_EN.pdf - Page 4 of 12
[8] https://www.ft.com/content/4e2967a4-8991-11e7-bf50-e1c239b45787
When an investment goes against expectation, what do you do? Hedging in IGOFX can help protect you against these unexpected risks. It is vital to ensure you do not miss out on any opportunities.
With Article 50 now triggered and the formal Brexit process underway, the world’s eyes will remain on Europe for the foreseeable future. Here, Michelle McGrade, Chief Investment Officer of TD Direct Investing, discusses for Finance Monthly the investment opportunities on the horizon and the relevance of the socio-political environment that surrounds businesses.
The UK’s vote to leave the EU last June was likely to catalyse political uncertainty across Europe. This was especially true with a number of Eurozone countries, including the Netherlands, France and Germany, holding elections over the course of 2017. With Donald Trump’s unexpected election victory in the US, concerns around the rise of populist governments gaining power in Europe have been further raised.
The result of Dutch election recently, in which the populist measures proposed by the Party for Freedom (PVV) lost out to the current People’s Party for Freedom and Democracy (VVD) government, was a positive outcome for European markets looking for stability. The risk of a potential exit from the European Union (EU) and the euro, as well as further restrictions on immigration, have all receded.
But, what does this mean for investors?
According to our most recent customer survey, 65% of respondents believe Europe has been wounded by the rise in the populist movement. But when asked whether a populist movement – in this case triggering Article 50 - will have a positive impact on their portfolios, investors were split; 38% were unsure while only 32% thought it would.
While the Dutch result suggests this risk might be over-inflated, the uncertainty will persist until the outcomes of these elections are known.
We need to stop being blinkered by the politics
When the Dutch election vote came through I said publically that instead of focusing on politics, we should probably concern ourselves more with the fundamentals. Ian Ormiston, fund manager of Old Mutual Europe (ex UK) Smaller Companies, agrees. He believes there are reasons to be positive on the outlook for European equities and agrees that we should largely ignore politics. “Investing in European equities is not the same as investing in Europe,” he says. “Next time you are tempted to talk politics, opinion polls, and the vagaries of the US Electoral College system, try restraining yourself, however tempting. No one knows how key political events are going to transpire, just as no one knows what the stock market’s reaction to those events is likely to be. As investors, let’s try to stick to the knitting and focus on company fundamentals.”
The cyclical recovery across Europe is showing signs of gaining momentum. Lead indicators remain positive and there are signs of improving confidence from companies and consumers. Eurozone unemployment is also continuing to fall, supporting the recovery seen by consumers. This is being aided by easier borrowing conditions for both corporates and households, helped by a European banking system which is finally becoming better capitalised and willing to lend. The threat of deflation is also abating, with inflation approaching the European Central Bank’s (ECB) target of 2%.
So, where are the European fund opportunities?
John Bennett, head of European equities at Henderson Global Investors and manager of Henderson European Selected Opportunities, points to a meaningful move away from growth and towards value investing. He is particularly keen on European banks.
“While it is early days, the signs are good that this change in leadership [from growth to value] could be durable,” says Bennett. “Such a shift, should it continue, favours Europe, home to many ‘value’ stocks, and is positive for the kind of stocks and sectors that investors have found easy to avoid for much of the last decade.”
“Our tilt to value accelerated significantly in the second half of 2016,” he continues. “That acceleration was writ large by our move into European banks despite, like many other investors, finding the sector still very easy to dislike. History shows that investing in European banks would have been a spectacularly wrong call from 2008 until recently, but we feel a combination of vastly improved capital ratios and a turning point in interest rate expectations has made the industry once again investable.”
In addition to these funds you could also tap into opportunities in European equities via BlackRock Continental European Income, which seeks to generate income by investing in companies with a strong competitive position and earnings stability, and with sustainable and growing dividends, or Jupiter European Special Situations, which invests in high quality companies whose profits are growing.
For European equities, the strengthening economic backdrop is improving earnings prospects. Following several years of moderate or no growth, expectations are for high single digit earnings growth this year, with further improvement in 2018.
Europe now turns its attention towards France and its upcoming presidential election. Should Marine Le Pen’s Front National win there could be consequences for the EU, but the two-stage electoral system in France could act against her. Nevertheless, investors are likely to remain cautious until the political risk across Europe reduces.
What we’ve learnt from Brexit is that no one knows how key political events are going to turn out, and what the stock markets’ reaction to those events will be. As investors, it is better to stick to what you do know and focus on a long-term investment horizon.
