One sector at the forefront of this disruption is FinTech, in which firms enjoy cost bases lower than those of traditional banks and freedom from the restraints of branch networks and legacy IT systems. As such, they can provide faster services and more innovative products, thereby revolutionising systems and processes, says Rosanna Woods, Managing Director of Drooms UK.

Digitisation will be a priority for firms

FinTech trends have disrupted the industry for over a decade now, and I believe this is the year challenger banks will become prime targets for investors. Large FinTech firms – and traditional financial companies – will also be more likely to get involved in the M&A space as digitisation remains a major driver for deal-making.

In terms of funding, 2018 marked the best-performing year for UK FinTech M&A (US$457.8 billion), which shows that investors are still hunting for the next big FinTech investment. And although Brexit has brought a lot of uncertainty, it could also mean that investors have a lot of dry powder.

Prime examples of challenger banks gaining momentum include Monzo’s crowdfunding exercise and Revolut’s increasing user signups to its finance app that facilitates both worldwide currency and cryptocurrency.

In the digital payments space, we have already seen the roll-out of digital payment methods, particularly via mobile, allowing consumers to make payments at a single tap of a card or mobile device. As banks continue to seek technologies to speed up customer service, they will look to FinTech companies to integrate with their own systems and enhance customers’ experiences.

In terms of funding, 2018 marked the best-performing year for UK FinTech M&A (US$457.8 billion).

Core drivers for M&A

In many ways, growth in FinTech innovation and M&A transactions each contribute to their own success. Businesses and investors are both attracted to opportunities that technology could bring in the industry, and its potential to automate services. This leads to several M&A transactions taking place for geographical expansion and technological innovation.

But will Brexit impact or slow down the developments of financial technologies in the sector? In my opinion, only moderately, if at all. In fact, Blackstone’s acquisition of Thomson Reuters (US$17 billion) last year shows that transaction values increased due to businesses continuously embracing innovation in digital banking, payments, and financial data services.

Although Brexit may have some impact on investors’ confidence in the UK, it is possible that they are simply biding their time. It is common for investors to practice caution when investing in foreign markets. But despite the transactional and regulatory uncertainty we currently face in the UK, I suspect that investors will see the growth in the FinTech space as opportunities to invest in emerging technologies.

Technology’s broader influence

Technology is not just the focus for investment, it is also helping the investment process too. In particular, it has paved the way to making the due diligence process for M&A more efficient and secure. The creation and utilisation of virtual data rooms to help solve the problems faced by dealmakers and investors has been embraced by the industry as good investments.

From a technology provider point of view, artificial intelligence, machine learning, and analytics have digitised the screening process of deals and greatly reduced the time undertaken for due diligence, as well as improving workflow. This is also true for many other sectors such as real estate, legal, life sciences, and energy.

As such, it makes sense to predict more investment in technology that will help the digital transformation of businesses, as demonstrated by Siemens’ investment in software companies in 2007, which generated US$4.6 billion in 2016.

Although Brexit may have some impact on investors’ confidence in the UK, it is possible that they are simply biding their time.

The heightened desire of investors to acquire businesses for digital transformation remains – as previously mentioned - one of the core drivers for M&A. Although Brexit may eventually present unexpected challenges to the FinTech sector, it will continue to thrive. This belief is supported by a report by Reed Smith that stated 31% of financial organisations plan to invest over US$500 million in the FinTech sector this year.

Opportunities amid uncertainties

Taking stock of the aftermath left by the EU referendum, Brexit has undoubtedly created lingering uncertainties and ever-present threats to deal making. But the overall value of UK M&A activities between 2017 and 2018 shows that Brexit did not prevent UK M&A from performing. In fact, over 140 M&A transactions in Q1 2018 were FinTech deals.

This was due to many factors, such as the strong relationship between UK and US investors, as well as the pound’s devaluation after the EU referendum, which made cross-border deals more attractive for global investors and particularly those deals involving businesses specialising in RegTech and digital payments.

Although the on-going Brexit negotiations are not going well and that a no-deal Brexit, despite not being ideal, is still a real possibility, recent history suggests that the FinTech M&A sector will not be as heavily affected as it might seem. The signs indicate that investors will continue to pursue new technologies that can help make business operations more efficient.

Going forward

What concerns businesses and investors in the UK is the fear that London may lose its crown as a FinTech hub. They will be looking for a Brexit deal that replicates the passporting rights the City currently enjoys and would also allow the UK economy to grow by about 1.75% by 2023 (as firms continue to trade in the City).

Moving forward, the difficulties Brexit presents are not insurmountable for the FinTech sector. It will continue to grow and disrupt the industry – whether the UK leaves the EU with a deal or not – and although it is wise to make contingency plans, businesses should avoid making drastic decisions. The FinTech sector is here to stay and it is well-equipped to withstand the many challenges ahead.

Rajeev Saxena, Managing Director of Velocity Capital Advisors, explains why the country needs high-growth tech businesses now more than ever, and why Britain needs investors to back them through the Enterprise Investment Scheme.

With the seemingly interminable Brexit negotiations, you could forgive investors for being more than a little tentative at the moment. However, it has never been more important to back new British companies through investment.

Doing so will give Britain the best chance to thrive going forward, whatever the fallout from Brexit. It will help to bolster the economy when it needs it most and create valuable jobs. Meanwhile, focusing on high-growth tech startups well positioned to thrive in a post-Brexit environment will help drive home-grown innovation across British industry, attract foreign investment and boost exports.

Of course, investors want to minimise risk, but they also want to get the best possible return on their investments. That’s why the Government launched the Enterprise Investment Scheme (EIS). By offering generous tax incentives, EIS reduces investor risk.

Meanwhile, honing the scheme to focus purely on high-growth tech companies, which the Government did last year, maximises investors’ potential returns. It also shows the confidence the Government has in these types of businesses and leaves no doubt as to where they think the future of Britain’s economy lies.

Investing in these companies through EIS enables investors to claim 30% tax relief on investments up to £2m. Plus, they can gain even more by investing through the small number of portfolio funds that also offer carryback, enabling investments to be offset against tax in the previous year.

To reduce risk further, investors should choose high-growth tech startup portfolios with strong performance records. They should select highly innovative businesses with a strong market knowledge that are producing something highly appealing to an international audience so that demand for their products and services will be there, whatever the deal with Europe is.

Any investors sceptical of EIS should take note that it was recently independently assessed as the best tax incentive investment scheme out of the 46 that currently exist across Europe. In fact, countries across the globe are interested to replicate EIS in their own economies.

Investors should also note that SMEs in the UK are bullish about the future, not cowering in the shadow of Brexit. Almost three-quarters (74%) predict revenue growth of more than 20% over the next year. This presents another reason to invest.

Overall in 2018, VC investment in Europe reached £18.9bn, surpassing 2017’s record numbers. Some 31.5% (£6bn) of this was invested in UK startups. This was more than 1.5 times the level invested in fast-growth businesses in Germany, and 2.6 times the levels of investment seen by the startup ecosystem in France. In light of these numbers, it’s not surprising that 600,000 startups launched in the UK last year, more than ever before, despite all the Brexit turmoil.

This shows that Britain is very much open for business and that high-growth startups are flourishing. This is great news for the country and for investors, and it’s vital that it continues through further investment. In short, this is no time for investors to get cold feet. They should back Britain and high-tech startups now.

Market Outlook

Mihir Kapadia, CEO and Founder of Sun Global Investments

When it comes to investment trends, every year appears to have a certain theme which dominates the markets and beyond throughout the course of those twelve months. 2017 was largely a stock market year, with global markets closing at record highs thanks to a booming global growth rate, loose tax and monetary policy, low volatility and ideal currency scenarios (for example, a weaker pound supporting inward investments). It was also a crazy year in the consumer segment with market momentum captivated with crypto assets, leading to established financial services firms to create special cryptocurrency desks to monitor and advise.  Today, things are looking very differently.

Markets have since moved from optimism (led by stock markets) to a cautious tone (with an eye out for safe haven assets). This is largely due to the concerns over slowing global growth rates (especially from powerhouse economies like Germany and China), volatile oil markets and Kratom Powder For Sale induces significant market threats with the likes of Brexit and the trade wars. The rising dollar has also not helped much, with Emerging Market and oil importing economies suffering with current account deficits.

At the World Economic Forum’s annual meeting in Davos last month, the International Monetary Fund (IMF) has warned of the slowdown, blaming the developed world for much of the downgrade and Germany and Italy in particular. While the IMF does not foresee a recession, the risk of a sharper decline in global growth is certainly on the rise.  However, this risk sentiment doesn’t factor in any of the global triggers – a no-deal Brexit leading to UK crashing out of the EU or a greater slowdown in China’s economic output.

While the IMF does not foresee a recession, the risk of a sharper decline in global growth is certainly on the rise.

Volatility expected

 We have lowered earnings expectations globally due to more subdued revenue and margin assumptions. We believe investors will be confronted by increased volatility amid slower global economic growth, trade tensions and changing Federal Reserve policy. Our base case relies on the view that the US may enter a recession in 2020. As the market dropped 9% in December, the worst market return in any 4th Quarter post World War II, many risks are starting to be discounted by the market. We have reduced industrials, basic materials and financials due to heightened risks.

There are a number of factors that are driving this view, but it is important to note that upsides to the risks do exist:

• The Fed: The Fed’s slow pace of hiking interest rates is meant to be just enough to keep wage inflation from accelerating, but not so much that it crushes business and consumer spending. It’s a difficult balancing act.
• Fiscal stimulus: The tightening of fiscal conditions has already created a slowdown that only time and lower rates will heal. The impact from the US Government’s lower tax rates and higher spend will end when 2019 does.
• Trade and China: The lack of clarity on trade has created an ‘uncertainty tax’, forcing companies to seek alternative means of procurement, adding to inefficiencies and holding back some investment decisions. China is trying to stimulate its consumer sector, but the country is already weighed down by high debt and defaults, and it has limited ability to create demand at present.
• European politics: Brexit negotiations and Italy’s budget situation have added to the political fog affecting investor confidence.

In uncertain markets like these, we should look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.

So what do you do?

We have dialled down risk in 2018 and will likely continue to do so in 2019 as we expect global growth to slow. However, the expected volatility could cause dislocations that are not fundamentally driven, resulting in tactical opportunities to consider.

The best piece of advice to be relayed is: “Don’t run for the hills”. In uncertain markets like these, we should look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.

It would be ideal to shift allocations from cyclical to secular exposures, especially away from industrials, basic materials, semiconductors and financials due to heightened risks. It would also be ideal to focus on high-quality companies with secular growth opportunities that can generate dividends as well as capital appreciation.

Two sectors stand out as both strategically and tactically attractive - aging demographics and rapidly improving technology are paving the way for robust growth potential in healthcare. Accelerating growth in data, and the need to transmit, protect, and analyse it ever more quickly, make certain areas in technology an attractive secular opportunity as well. Where possible, our advice to investors is to maintain a tactical portion of their risk assets, because volatility may give them the opportunity to find mispriced sectors, themes and individual securities.

Still, in this climate, the bottom line is that you should be increasingly mindful of risk in your portfolio so that you can reach your long-term investment goals. 

Eastern Economies vs. Western Economies: Countries, Sectors and Projects to Watch

Dr. Johnny Hon, Founder & Chairman, The Global Group

The global economic narrative in 2018 was characterised by growing tensions between the US and China, the world’s two largest economies. The US imposed 10% to 25% tariffs on Chinese goods, equivalent to more than $250bn, and China responded in kind.

This had a seismic effect on global economic growth which, according to the IMF, is expected to fall to 3.5% this year. It represents a decline from both the 3.7% rate in 2018 and the initial 3.7% rate forecast for 2019 back in October.

Although relationships between Eastern and Western economies are currently strained, suggestions that a global recession is on the horizon are exaggerated. China’s economy still experienced high growth in 2018.

However, it is clear that trade wars have no winners. The rise of protectionism in the West is creating more insular economies and we are at a time when increased efforts are needed for mutual understanding. There are still enormous opportunities across the globe: India is among several global economies showing sustained high growth, and innovations in emerging markets such as clean energy or payments systems continue to gather pace. Investors who are savvy and businesses with true entrepreneurial flare can triumph at a time when others may be stagnating.

The rise of protectionism in the West is creating more insular economies and we are at a time when increased efforts are needed for mutual understanding.

Here are the exciting countries, sectors and projects to look out for in 2019:

Countries

Recent trends in foreign direct investment (FDI) reveal a growing trend to support developing economies. In the first half of 2018, the share of global FDI to developing countries increased to a record 66%. In fact, half of the top 10 economies to receive FDI were developing countries.

This trend will accelerate in 2019 - the slow economic global growth, and subsequent currency depreciation means the potential yield on emerging market bonds is set to rise dramatically this year. More and more investors are realising the great potential of these developing economies, where the risk versus reward now looks much more attractive than it did in recent years. Asia in particular has benefited from a 2% rise in global FDI, making it the largest recipient region of FDI in the world.

India and China are both huge markets with a combined population of over 2.7 billion, and both feature in the world’s top 20 fastest growing economies. However, the sheer quantity of people doesn’t necessarily mean the countries are an easy target for investment. There are plenty of opportunities in both India and China, but it takes a shrewd investor with a good local business partner to beat the competition and find the right venture.

Other Asian economies to invest in can be found in Southeast Asia, including Vietnam, Singapore, Indonesia and Cambodia. In a recent survey by PwC, CEOs surveyed across the Asia-Pacific region and Greater China named Vietnam as the country most likely to produce the best investment returns – above China.

Investors who are savvy and businesses with true entrepreneurial flare can triumph at a time when others may be stagnating.

Sectors

One sector in particular which remained resilient to the trade wars throughout 2018 was technology. By mid-July, flows into tech funds had already exceeded $20bn, dwarfing the previous record amount of $18.3bn raised in 2017. This was a result of the increased accessibility and popularity of technologies in business.

In the area of Artificial Intelligence (AI) for example, a Deloitte survey of US executives found that 58% had implemented six or more strains of the technology—up from 32% in 2017. This trend is likely to continue in 2019, as more businesses realise AI’s potential to reduce costs, increase business agility and support innovation.

Another sector which saw significant investment last year was pharmaceuticals and BioTech. By October, these had already reached a record high of $14 billion of VC investment in the US alone. One particular area to watch carefully, is the rising demand for products containing Cannabidiol (CBD), a natural chemical component of cannabis and hemp. Considering CBD didn't exist as a product category five years ago, its growth is remarkable. The market is expected to reach $1.91 billion by 2022 as its uses extend across a wide variety of products including oils, lotions, soaps, and beauty goods.

Projects

At a time of rising trade tensions and increased uncertainty, cross-border initiatives are helping to restore and maintain partnerships and reassure global economies. China's Belt and Road Initiative is a great example of how international communities can be brought closer together. From Southeast Asia to Eastern Europe and Africa, the multi-billion dollar network of overland corridors and maritime shipping lanes will include 71 countries once completed, accounting for half the world’s population and a quarter of the world's GDP. It is widely considered to be one of the greatest investment opportunities in decades.

The Polar Silk Road is another international trade initiative currently being explored. The Arctic offers the possibility of a strategic commercial route between Northeast Asia and Northern Europe. This would allow a vast amount of goods to flow between East and West more speedily and more efficiently than ever before. This new route would increase trading options and would make considerable improvements on journey times – cutting 12 days off traditional routes via the Indian Ocean and Suez Canal. It could also save 300 tonnes of fuel, reducing retail costs for both continents.

Since founding The Global Group - a venture capital, angel investment and strategic consultancy firm - over two decades ago, I have seen the global economic landscape change immeasurably. The company is built around the motto ‘bridging the frontiers’, and now more than ever, I believe in the importance of strong cross-border relationships. Rather than continuing to promote notions of protectionism, we must instead explore new ways of achieving mutual benefit and foster a spirit of collaboration.

Brexit, Trade Wars and the Global Economy

Robert Vaudry, Chief Investment Officer at Wesleyan

If there’s one thing that financial markets do not like, it is uncertainty - which is something that we’ve faced in abundance over the last couple of years.

The UK’s decision to leave the European Union and President Trump’s 2016 election in the US, sent shockwaves through markets, and the two years that followed saw increased volatility across asset classes. This year looks set to be fairly unpredictable too, but in my view there are likely to be three main stabilising factors. Firstly, I expect that the UK will secure some form of a Brexit deal with the EU – whatever that may look like – which will give a confidence boost to investors looking to the UK. Secondly, the trade war between America and China should also come to an end with a mutually acceptable agreement that further removes widespread market uncertainty. Thirdly, the ambiguity surrounding the US interest rate policy will abate.

The Brexit bounce

A big question mark remains over whether or not the UK is able to agree a deal with the EU ahead of the 29th March exit deadline. However, with most MPs advocating some sort of deal, it’s highly unlikely that the UK will leave without a formal agreement in place. So, what does this mean? Well, at the moment, it looks more likely than ever that the 29^th March deadline will need to be extended, unless some quick cross-party progress is made in Parliament on amendments to Theresa May’s proposed deal. While an extension would require the agreement of all EU member states, this isn’t impossible, especially given that a deal is in the EU’s best interests as the country’s closest trading partner.

The ambiguity surrounding the US interest rate policy will abate.

The result of any form of deal will be a widespread relief that should be immediately visible in the global markets. It will bring greater certainty to investors, even if the specific details of a future trading relationship between the UK and EU still need to be resolved. Recently, it was estimated that Brexit uncertainty has so far resulted in up to $1trn of assets being shifted out of the UK, and I personally don’t see this as an exaggeration. Financial markets have been cautiously factoring Brexit in since the referendum vote in 2016 and, if we can begin to see a light at the end of the Brexit tunnel, it is likely that some of these vast outflows will be reinvested back into the UK. We can also expect to see a rise in confidence among UK-based businesses and consumers, at a time when the unemployment rate in the UK is the lowest it has been since the mid-1970s.

All of these outcomes would help lead to a more buoyant UK economy and the likelihood that UK equities could outperform other equities – and asset classes – in 2019.

Trade wars – a deal on the table?

Looking further afield, the trade tensions that were increasingly evident between the US and China last year could also be defused. The last time that China agreed to a trade deal, it was in a very different economic position – very much an emerging economy, with the developed world readily importing vast quantities of textiles, electronic and manufacturing goods. However, given China’s current position as one of the world’s largest economies, it has drawn criticism from many quarters regarding unfair restrictions placed on foreign companies and alleged transfers of intellectual property.

Either way, global financial markets are eager for Washington and Beijing to reach a mutually agreeable trade deal to help stimulate the growth rates of the world’s two largest economies.

It was estimated that Brexit uncertainty has so far resulted in up to $1trn of assets being shifted out of the UK.

Be kind to the FED

2018 saw an unprecedented spat between the US President and his Head of the Federal Reserve. What began as verbal rhetoric quickly escalated into a full-frontal assault on Jerome Powell, and the markets were unimpressed. With the added uncertainty about the impact of a Democrat-led US House of Representatives, we headed into a perfect storm, and equity markets in particular rolled over in December. Ironically, this reaction, coupled with a data showing that both the US and the global economy are generally slowing down – albeit from a relatively high level – has resulted in a downward revision of any US interest rate rises in 2019. The possibility of up to four US interest rate rises of 25bps each during 2019 is now unlikely – I expect that there will only be one or two rises of the same level.

 Transitioning away from uncertainty

So, in summary, 2019 is set to be another big year for investors.

The recent protracted period of uncertainty has hit the markets hard, but we’ll have a clearer idea of what lies ahead in the coming months, particularly regarding Brexit and hopefully on the US and China’s trade relations too. If so, this greater certainty should pay dividends for investors in the years to come. UK equities are expected to strongly bounce back in 2019, which is a view that goes against the current consensus call.

The United Kingdom, specifically London, has built a position as Europe’s primary financial hub, bridging the gap between the European Union and Asia, the United States and other regions. After Brexit comes into effect in March 2019, this once unassailable position will no longer be certain if it becomes more difficult for banks and other financial enterprises to provide services to EU clients due to a loss of ‘passporting’ rights – if no contingency plans are made.

Many financial institutions are not waiting to see how Brexit plays out and are seriously considering – or already planning – to move at least part of their operations to remaining EU countries in order to be prepared for any fallout from Brexit. Hiring rates in London’s financial sector have already halved, according to LinkedIn – reportedly due to the uncertainty surrounding Brexit and how it will impact the industry. Research from EY shows almost a third of banks and asset managers in the City of London confirmed that they are looking at moving staff to locations such as Dublin, Amsterdam and Frankfurt.

As a result, teams will be scattered across numerous time-zones and locations, with more employees likely to be working from remote locations, including their homes. Connecting a relocated and dispersed workforce is no easy task, and if the process is not well managed, it can cause serious disruption to day-to-day activities. Banking and financial services organisations need to have the right tools in place to ensure far-flung teams can communicate effectively and implement a standardised and coordinated way of working so that employees do not have to flit between numerous applications to complete tasks, collaborate on projects, monitor progress, manage resourcing and track deadlines. Fortunately, disruption can be minimised by utilising tools that nurture joined working environments despite geographical barriers and offer structure that keeps employees at different locations on the same page – in real time.

The challenges of collaborating across borders

Remote working is not new phenomenon – it’s widespread and a hugely popular way of working –

But many businesses are still trying to overcome the barriers it presents to communication and collaboration. Clarizen’s own research has shown that some of the most prevalent issues workers struggle with when working remotely include:

• Struggling to communicate with colleagues;
• Difficulty to remain efficient;
• Limited access to up-to-date documents;
• Finding it difficult to prioritise.

The banking and finance industry needs to ensure that these issues are resolved before Brexit takes place. Otherwise, the serious and negative impact they have on effective collaboration, productivity and business profitability.  Having to relocate operations is just one area of business that organisations need to navigate as the UK continues its withdrawal from the EU.

Internal company restructuring, product and services analysis and engagement planning are also elements businesses have to plan and execute, which is why it’s so important that teams have tools that facilitate a coordinated work environment during this tumultuous period.

Equipping employees with the tools to succeed

During Brexit and beyond, banking and financial organisations need to ensure employees are equipped with tools that help promote coordination between dispersed teams, while maximizing efficiency. Recent research from Clarizen found that almost three quarters of respondents said that what they specifically need to boost communication and collaboration among employees is technology, structure and support that enables them to overcome geographical barriers and the gap between time zones to increase productivity, ensure management oversight and foster flexibility.

What can help achieve this is a cloud-based platform that enables real-time collaboration across locations and empowers teams to coordinate workflow, track progress, align goals, allocate budget and meet deadlines from any device and location.

Overcoming communication overload

Ahead of Brexit, businesses need to ensure that they pick the right tool to maximize productive interactions between employees. Some businesses have previously used social media apps to facilitate easy and frequent employee discussion – such as WhatsApp and Facebook – in the belief they would streamline communications between workers and reduce long email chains that cause frustration and confusion. Unfortunately, such applications have often only served to encourage non-work chat and oversharing of irrelevant information that doesn’t bring employees any closer to meeting business objectives.

In a bid to become more focused in their approach, businesses have been turning to business-focussed communication apps. A recent global survey showed that, in the past year, companies deployed one or more of the following apps to improve productivity: Skype (39%), Microsoft Teams (14%), Google Hangouts (8%) and Slack (7%). Yet, even then, efforts to boost productivity proved fruitless as they merely became a place for office banter and overloaded people with numerous notifications and interruptions, which negatively impacts productivity.

It’s a modern workplace malady that has been dubbed ‘communication overload’, which is symptomized by workers struggling under the weight of clusters of unfocused messages, meeting requests and unnecessary interruptions. Clarizen’s research indicates that, in the end, apps that fail to directly link communication to business activities, aims and status updates actually hamper collaboration, effectiveness and efficiency. The survey showed that 81% of respondents said that, despite taking steps to improve communication among employees, they still lack a way to keep projects on track and provide management oversight – and only 16% of the companies surveyed said productivity levels were ‘excellent’ – while a nearly quarter said they were ‘just OK’ or ‘we need help’.

Looking ahead to a post-Brexit world

Brexit presents the banking and finance industry with a number of challenges that could put successful collaboration – and ultimately revenues and profits – at risk. However, by employing tools and methods that encourage an environment that nurtures a truly collaborative environment – where communication is in a business context and reporting in real time – the sector can enhance productivity and business agility, taking some of the sting out of any staff redeployments necessitated by Brexit. Even though it’s not clear what shape Brexit will take, there is no reason businesses in the banking and finance sector cannot minimise disruption and its potential costs by providing their employees with an approach and the tools they need to succeed during Brexit and beyond.

Website: https://www.clarizen.com/

Amidst the recent shock resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson, investment uncertainty, slower economic growth and a weaker pound, the United Kingdom is on its way to a slow but steady Brexit, with negotiations about the future relations between the UK and the EU still taking place.

And whilst the full consequences of Britain’s vote to leave the EU are still not perceptible, Finance Monthly examines the effects of the vote on economic activity in the country thus far.

Do you remember the Leave campaign’s red bus with the promise of £350 million per week more for the NHS? Two years after the referendum that confirmed the UK’s decision to leave the European Union, the cost of Brexit to the UK economy is already £40bn and counting. Giving evidence to the Treasury Committee two months ago, the Governor of the Bank of England Mark Carney said the 2016 leave vote had already knocked 2% off the economy. This means that households are currently £900 worse off than they would have been if the UK decided to remain in the EU. Mr. Carney also added that the economy has underperformed Bank of England’s pre-referendum forecasts “and that the Leave vote, which prompted a record one-day fall in sterling, was the primary culprit”.

Moreover, recent analysis by the Centre for European Reform (CER) estimates that the UK economy is 2.1% smaller as a result of the Brexit decision. With a knock-on hit to the public finances of £23 billion per year, or £440 million per week, the UK has been losing nearly £100 million more, per week, than the £350 million that could have been ‘going to the NHS’.
Whether you’re pro or anti-Brexit, the facts speak for themselves – the UK’s economic growth is worsening. Even though it outperformed expectations after the referendum, the economy only grew by 0.1% in Q1, making the UK the slowest growing economy in the G7. According to the CER’s analysis, British economy was 2.1 % smaller in Q1 2018 than it would have been if the referendum had resulted in favour of Remain.

To illustrate the impact of Brexit, Chart 1 explores UK real growth, as opposed to that of the euro area between Q1 2011 and Q1 2018.

As Francesco Papadia of Bruegel, the European think tank that specialises in economics, notes, the EU has grown at a slower rate than the UK for most of the ‘European phase of the Great Recession’. However, since the beginning of 2017, only six months after the UK’s decision to leave the EU, the euro area began growing more than the UK.

Reflecting on the effect of Brexit for the rest of 2018, Sam Hill at RBC Capital Markets says that although real income growth should return, it is still expected to result in sub-par consumption growth. Headwinds to business investment could persist, whilst the offset from net trade remains underwhelming.”

All of these individual calculations and predictions are controversial, but producing estimates is a challenging task. However, what they show at this stage is that the Brexit vote has thus far left the country poorer and worse off, with the government’s negotiations with the EU threatening to make the situation even worse. Will Brexit look foolish in a decade’s time and is all of this a massive waste of time and money? Or is the price going to be worth it – will we see the ‘Brexit dream’ that campaigners and supporters believe in? Too many questions and not enough answers – and the clock is ticking faster than ever.

Below Rebecca O’Keeffe, Head of Investment at interactive investor, comments on the latest global market updates offering insight into the recent Ryanair strike debacle and Brexit progress.

Global markets continue their malaise, as trade tensions weigh on sentiment amid fears that global growth will slow. With no major catalysts to drive the market higher, the risks are on the downside and the danger is that equity markets will drift lower. Earnings will allow individual stocks or even sectors to out or underperform, but the broader indices are likely to find it more difficult to gain traction.

What a difference a week makes. Just last week, Theresa May appeared to have come up with a revised vision of Brexit that offered a middle ground and might have delivered a softer Brexit. However, resignations, rebellions, concessions and amendments now mean that it is difficult to be sure what the UK’s position actually is.  With May’s government somewhere between a hard Brexit and no deal, it will be very difficult for Europe to sign off on any deal based on the current UK confusion. The summer recess may provide some respite, but as the weeks ticks by the prospect of no deal is rising rapidly and the impact on sterling could become more severe than it already is, and international companies may once again begin to rachet up the rhetoric regarding the very real risks of a bad deal.

Ryanair are suffering multiple threats, all of which are weighing on the bottom line. Sustained higher oil prices, air traffic control strikes in Europe, bigger wage costs and increased competition are all problems for the low-cost airline. Ryanair has historically been reasonably good at hedging their oil exposure, but prolonged higher prices have increased their costs. Strikes by European air traffic controllers, in particular in Marseilles, have wreaked havoc for many European airlines, causing significant cancellations and disruption. Further strikes by Ryanair pilots are adding to their woes, alongside additional staff wage costs for pilots. The prospect of further competition in the low-cost sector from IAG is another headache that Ryanair could do without. Some of these headwinds are generic and some are self-made, but it is difficult to see much upside for Ryanair in the short term.

Esther McVey must resist the temptation to tinker with the pension system and engage fully with the pensions industry, affirms the CEO of one of the world’s largest independent financial advisory organisations.

Nigel Green, deVere Group’s chief executive and founder, is speaking out after Ms McVey, the Member of Parliament for Tatton, was promoted to Secretary of State for Work and Pensions on Monday night as part of Prime Minister Theresa May’s cabinet reshuffle.

Mr Green says: “Successive Secretaries of State for Work and Pensions have been unable to resist tinkering around with the pension system and pension policy. Ms McVey must not fall into this trap.

“Continual short-termist tinkering is counterproductive and misguided as pensions are, by their very nature, long-term.

“The industry and consumers demand a continued period of stability in the often-confusing and complex pensions sector to give the more recent major shake-ups, such as the new state pension, the new pension freedoms and the latest annual tax allowance rules, time to settle.”

He continues: “The Department for Work and Pensions has a huge impact on millions of lives and requires a leader with empathy, big picture perspective, as well as a keen eye for complex detail.

“With this in mind, I would urge Ms McVey to engage fully with the pensions industry and pension savers on any future changes in order to ensure that the current and forthcoming challenges are successfully addressed and met, the policy fundamentals are right, and that any errors of the past are put right in a measured, balanced and just way.”

In November last year, Chancellor Philip Hammond was almost universally praised for delivering a Budget that left pensions, in the main, untouched. At the time, Mr Green said: “We are delighted that Mr Hammond has left pensions alone in this Budget and we hope that this lack of meddling is the start of a new approach.”

Following Esther McVey’s appointment, the deVere CEO concludes: “Whilst politics is an ever-changing and choppy sea, our individual requirements remain the same. We all still grow older and we must all still continue to plan our retirement.

“Retirement planning is a long-term project, which needs a secure, long-termist policy and system framework, and pension savers must remain focused on planning for their long-term needs and wants to enjoy the opportunities retirement can bring.”

(Source: deVere group)

Following the shock Genereal election result from this morning, Finance Monthly reached out to Mark Dampier, Head of Investment Research at Hargreaves Lansdown, who discusses the impact that the election result will have on the UK investment market.

The current siuation is very different to the Brexit vote of last year. While the result is a surprise and may lead to another election later this year – market reaction has generally been subdued so far because the Tory government will remain in power, but a hard Brexit now looks less likely.

There will be no dramatic changes in domestic policy immediately, as there would have been under Labour, had they got in. Therefore, I see no need to make any rash investment decisions, given the range of possible outcomes over the next few weeks. Investors should sit tight or even buy, if the opportunity arises.

Overseas investment is unaltered by the election apart from changes to sterling, which should act positively as we have seen over the last 12 months. That said - remember a softer Brexit could see sterling recover.

We have always advocated a level-headed, long-term approach to investing, and I would urge investors to resist the temptation to make short-term, knee-jerk reactions. We could see some volatility over the coming days as more details emerge about the new government.

Once a government is in place, I expect the dust to settle fairly quickly. There will be a dawning realisation that everything has changed and nothing has changed. For the vast majority of UK companies, it will be a case of “business as usual” on Monday. Many companies have been around for decades and seen governments of both colours come and go.

In our view, investors should continue to pursue their long-term strategy. The international nature of the UK market means that in reality, the election result matters little for many UK-listed companies.

Chris Saint, Currency Analyst added: “Uncertainty over the formation of the next government means sterling exchange rates will inevitably remain volatile in the days ahead, as markets try to fathom how this could impact upcoming Brexit negotiations. However, the pound’s initial declines may have been tempered by hopes that any eventual deal which requires cross-party support might actually imply a ‘softer Brexit’ approach which could see the UK keep trade access to the EU single market for trade.”

This afternoon reports indicate Theresa May, in her speech regarding Brexit negotiations, says the UK “cannot possibly” remain part of the European single market. In addition, the PM has stated that parliament will also get to vote on the final agreement with the EU.

Following the speech, Finance Monthly has heard commentary from the below sources, who have provided their insight into the developments.

Jake Trask, currency analyst, UKForex:

Sterling rose today as the markets welcomed the content of Theresa May’s speech outlining the framework of how the UK will approach its negotiations to exit the EU. The markets appear to have taken heart from the prime minister’s reassuring words, signalling that the UK government will do all it can to avoid a cliff edge scenario, where at the end of the two year process we default to WTO tariffs.

The PM said her preferred approach would be to implement the changes in a staggered manner. This controlled method of exit appears to have calmed market fears, with the proxy for Brexit sentiment, the pound, rising two cents against the dollar throughout the day.

Bruce Johnston, Head of International Finance, Morgan Lewis:

There are no plans for an overall transitional deal, but there may be interim arrangements to minimise disruption for certain sectors of the economy.

Free trade agreements with the EU and the USA will take many years to negotiate (long after the UK leaves the EU).  Serious negotiation of free trade agreements cannot start until the exit agreement with the EU is signed (and ratified by the 27 EU countries).

We await the court case in Dublin which (amongst other things) may determine if the UK remains in EFTA after it leaves the EU. It appears that the UK government does not think so, by May’s statements on the single market and the customs union.

Mark Boleat, Policy Chairman, City of London Corporation:

The Prime Minister’s speech today added a degree of clarity for the Government’s Brexit strategy.

We welcome the Prime Minister’s ambition to retain the greatest possible access to the single market, which is important to the UK’s financial and professional services industries.

Passporting rights and access to leading talent – facilitated by the single market – has, in part, helped make Britain the world’s leading financial centre, but the Government fully recognises that protecting these vital industries is a priority.

Trade between the UK and the European Union has helped make our country prosperous. We welcome that Government recognises the value and importance of EU companies seeking access to the services of the City of London.

We also welcome the decision to trade more with existing and new international partners – this has the potential to be the prized trophy of the UK’s decision to leave the EU.

The City has been vocal on the need for a transitional arrangement from the time Britain formally leaves the EU and when the new arrangements come into effect. Following today’s announcement, this becomes an even greater necessity. We would like to see a transitional agreement announced as soon as possible.

Government’s phased implementation plan must avoid a cliff-edge and will be beneficial for firms across all sectors, especially financial and professional services firms. The Government must stick to this commitment.

Britain has long been a magnet for global talent. To continue the sector’s success, with 12% of City workers made up of European staff, it is important the flow of leading talent to the UK continues. We support the wish to maintain the rights of EU citizens currently working in the UK.

Charles Brasted, Partner, Hogan Lovells:

For those who have been listening carefully to Theresa May and the Government in recent months, today was the day when the PM had to face up to the implications of what has already been said.  What the PM has done is to reaffirm the primacy of key commitments to taking back control of laws, courts and borders — and to admit  that that necessarily rules out membership of the EU's clubs.

Mrs May's aspiration is a bespoke deal that emphasises access, not membership, that seeks to be part of a customs union – but not on the terms of the existing customs union, which preclude the UK striking its own trade deals — and that is based on on-going regulatory consistency and reciprocity. The impression from the EU is likely to be that this is precisely the cherry picking that they have warned against. However, the EU has shown itself able to agree sector-specific arrangements based on these principles and the UK's answer must be to show that it is seeking an agreement that preserves the best of the relationship for the benefit of both sides.

Mrs May has also been keen to reassure businesses and others by highlighting the intention for continuity of laws and rules immediately post-Brexit and for an "implementation phase" that would deliver the full future relationship over time through a smooth and ordered process of realignment.

Every one of the aspirations expressed by the UK Government today will demand exceptional political skill to negotiate and will be complex to implement legally and commercially. The objectives are now clear – the path towards them is uncharted.

Set to present the UK’s plans for the EU exit today, British Prime Minister Theresa May has ruled out any “half-in, half-out” situation, stating that the UK’s 12 point plan aims to not leave the nation with a sort of “partial membership,” but to build a "new and equal partnership" with the EU.

Within the 12 point plan, the PM says the UK intends to trade “as freely as possible,” but the government has not yet revealed much detail about the upcoming negotiations with the EU. It has however stated that the Brexit package talks will commence by the end of March.

It has taken over six months for the UK government to formulate its coming actions, and for now all eyes are on the UK’s intentions in regards to the single market, the customs union, and its trade relationship with the EU in years to come.

In previous reports, EU leaders have indicated that they will not allow the UK to “cherry pick” benefits such as the single market, while letting go of obligations such as the free movement of people. The PM on the other hand has suggested a curb on migration is one of the country’s top priorities.

According to the BBC, Labour's Sir Keir Starmer said: "Preserving our ability to trade successfully in Europe has to be the priority for business. Staying in the customs union is the best way to achieve that."