Sandeep Mohanan, Senior Manager of our Hong Kong's front office recruitment team, discusses his predictions for what Brexit may mean for Hong Kong businesses.
“If you’re the smartest man in the room, you’re in the wrong room.”
A great quote and very sound advice.
That said, as the world stands slightly stunned in the aftermath of Brexit, as George Soros and a large proportion of the global finance industry bet against it happening, another quote I heard the other day resonated yesterday, “The older you get, the more you realise that nobody has a clue and everyone’s just winging it.”
With this in mind, whilst I was not the smartest man in the room ten days ago - nor may be as I write this, some of my predictions, based on reasoned arguments, as to what Brexit might mean for Britain and our business in Hong Kong.
1) Sterling is in less danger of falling off a cliff than markets predicted.
With the pound up to 1.35 against the dollar* from previous 31-year lows, markets appear less concerned about Britain’s prospects in the short term. After all, even when the UK enacts Article 50 of the Lisbon treaty, there are still years for new agreements to put in place. There are headwinds concerning a ratings downgrade current account deficit, but a 1.15 exchange rate as Soros predicted in the event of Brexit looks a long way off, at least in the short term.
Up until 10 days ago, the UK economy was in decent shape, and it's too early to tell what impact the decision will have in the short term. The BoE’s actions in the coming months will be key to keeping inflation in check, and it may provide a solid basis for Mark Carney to justify increasing interest rates to the markets. Taking the top job at the BoE just before oil and the Canadian dollar tanked was either inspired or lucky. Let’s just hope his midas touch continues.
2) There are many arguments for Britain to join the European Economic Area but there are also a lot of compelling arguments for why it should not. Britain is unlikely to do so, particularly under a pro-exit government.
Norway as a EEA member is not particularly happy with the deal it has with the EU. They are subject to most of the legislation that befalls EU membership, including free movement of labour and capital, but they have no voting rights as to whether legislation is implemented which is not exactly appealing. In Britain’s case, like it or not, for those who voted to leave EU, the right for the UK to determine their immigration policy was a key reason to leave as the bureaucracy emanating from Brussels.
With this in mind, Britain will likely abstain from joining the EEA but will likely join the EFTA, and negotiate its own trade agreements. This will be a more challenging route forward, but would likely to suit the ambitions of ministers mandated to exit the EU by the electorate.
3) London’s position as the globe’s top financial centre is going to be challenged, but will win out in the end.
There are 415,000 bankers employed in the City of London and a further 145,000 employed in Canary Wharf. Despite this, having recruited there for five years, I can tell you that even then, it can be extremely difficult for headhunters to find the best talent for their clients. Talk of relocating and attracting all these workers to Frankfurt: which employed 73,800 corporate banking workers in 2012; or Paris which is 32nd in the financial centres index; or Amsterdam (34th) or Dublin (29th), appears pretty improbable despite their ambitions.
Some Americans have joked to me in the past that they struggle to understand what Brits say in English 75% of the time. Imagine the trouble they would have trying to order a tall skinny Macchiato in Frankfurt!
Notwithstanding this competitive advantage, the US accesses the EU using a mechanism known as the financial passport, and is not subject to its immigration laws or many of its rules and regulations. Is there any reason to think that the UK as the world's fifth largest economy will not be able to do the same?
4) The EU’s “project fear” has just started, and expect Brussels to do what they do best, drag out decision-making to the max.
Reading between the lines, France and Germany’s concerns are less about the UK leaving the EU than the prospect of the whole project disintegrating. The UK is not part of the Euro and as such is not that much help when bailing out failed member states, nor has it been a happy EU member for a number of years.
In a way, they may be relieved that we are leaving. Rather than this, what France and Germany are really worried about is what’s being whispered behind closed doors in Europe, and I expect a lot of politicking and brinkmanship during the negotiations. There will be give and take, as the EU will need to change, and faster than it’s accustomed to, in order to ensure its member states don’t follow Britain’s lead. What is quite probable is that reading the FT may become a slightly tedious pastime in the coming years, and markets will twitch every time there is a hiccup at the negotiating table.
5) The uncertainty in the EU and strength of the US Dollar may just help us out in Asia.
Investing in the EU has become a slightly more risky business than it was ten days ago. Building a car plant in France or Belgium with access to a common market, is not as sure a certainty as it has been for the last 40 years. Korea and China have rapidly developing car industries for example, and it may be a better bet for firms to invest there rather than Europe. Did I also mention, they are also rather good at building very, very large ships?
In addition, with the strength of the US dollar, exporters in these countries will have a distinct advantage and are likely to benefit. Add to this, the impact a higher dollar will have on US exports and corporate earnings from overseas (not great for share prices), Asian equity markets may see an influx of capital from “safe havens’ over the short to medium term - here’s hoping...
Whatever happens, it’s going to be an interesting ride!
*as at 30th June, GBP USD exchange rate was 1.3492