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2017 / iberian.propery // 77
ISSUE: TOP IBERIAN Investors //dossier
What comes next in the Brexit process?
With Article 50 expected to be triggered by the end of March 2017, the
UKwill then start the formal two-year process of exit negotiations with the
EU. We asked our investment experts what they expect to happen next.
The first point of disagreement between the UK and its European part-
ners may well be the exit payment the UK will need to make to settle
existing liabilities.
Azad Zangana, Senior European Economist & Strategist, said:
“The triggering of Article 50 itself will largely be a non-event for investors
given that it has been widely flagged for some time. However, in the
near-term, an issue that could become a political hot potato is the size
of the UK’s exit payment.
“Michel Barnier, the European Commission’s chief Brexit negotiator, has
indicated that the UK may be asked to pay up to €60 billion (£51 billion
or 2.7% of 2016 GDP) to cover the cost of existing commitments. Analysis
conducted by the Financial Times newspaper suggests that this is an
upper estimate of gross liabilities. It estimates that the final payment
could be worth €20 billion (£17 billion or 0.9% of GDP).
“A significant political fight over the UK’s exit bill could jeopardise the
chances of a favourable/friendly trade agreement at a later point.
Despite the UK’s desire to negotiate a trade deal in tandem with the
divorce proceedings, there is no requirement for trade to be concluded
under Article 50.
“The precise proceedings and outcome of the negotiations will remain
highly uncertain for some time. This is likely to keep investors on high
alert for any signs of better or worse outcomes than expected. However,
the negotiations themselves are unlikely to have an economic impact
before Brexit actually happens.”
Howwill UK stocks be affected?
There is likely to be limited initial impact on equity markets, but there
could be periods of volatility as the negotiating process unfolds.
David Docherty, Fund Manager, UK Equities, said:
“In market terms, the triggering of Article 50 is already well discounted
and the notification itself is therefore unlikely to have an impact on UK
equities. In contrast, the two years of negotiations which follow Article
50 will have a much greater influence on UK companies and markets.
“As the bargaining continues, we expect to see recurring bouts of
market volatility as investors respond to, and anticipate, evolving
negotiating positions.
“We believe that the ebbs and flows of the negotiating process should
throw up valuation anomalies in a number of stocks as investors attempt
to identify and calibrate the implications for individual companies.
“Our bottom-up stockpicking approach should serve us well as we look
to exploit these mispriced opportunities when they emerge.”
A bottom-up investment approach is based on analysis of individual
companies, where that company’s history, management, and potential
are the primary focus, rather than general market or sector trends.
Meanwhile, companies will be seeking certainty over their access to EU
markets, but it may be some time before this is agreed.
Roger Doig, Analyst, European Equities, said:
“Assuming there are no unexpected obstacles to triggering Article 50
thrown up by the House of Lords, it should be triggered by the end
of March. A period of negotiation – potentially quite lengthy and quite
fractious – will follow.
“In this time, UK-based banks and insurers will continue to navigate in the
fog, but with the two-year exit clock ticking, their contingency planning
will become more urgent.
“Demands for greater clarity about how UK-based firms can access EU
markets will grow, but the government won’t be in a position to give this
clarity while the exit bill remains unresolved.”
Some real estate markets may be more affected than
others
The real estate sector is an area of particular focus amid the risk that some
companies may decide to relocate certain operations. London could
see the biggest impact, with other UK cities likely to be less affected.
Mark Callender, Head of Real Estate Research, said:
“Winning cities across the UK such as Manchester, Bristol and Leeds are
likely to continue to benefit from ongoing tenant demand. These cities
share the common attributes of diversification, modern infrastructure
and quality of life.
“Our main concern is the impact which Brexit could have on the London
office market. While London will continue to be a major hub for interna-
tional business given its large pool of skilled labour and other inherent
advantages (e.g. English law, time zone), there is a risk that banks and
other financial services will have to switch some of their activities to the EU.
“In turn this could affect the lawyers and other professional services
who work for the banks. We are also conscious that around a quarter of
London’s construction workers are from other EU countries.”
OriginALLY Published in 07/03/2017 @