This blog examines the possible impact of a no-deal Brexit on foreign investors into the UK
The past month in the United Kingdom has been tumultuous, to say the least. In the space of 30 days, the UK has seen the ascendancy of a new Prime Minister, the hottest July day on record (a sweltering 38C) and the value of the pound hit its lowest levels against the euro since the 2008 global financial crisis. Only one of these events is unrelated to Brexit.
The pound sterling?
The pound’s value is largely being dictated by Brexit, the value fluctuating with every positive or negative headline. When Boris Johnson arrived at No. 10 Downing Street on 24 July 2019 to assume office as the new UK Prime Minister, it was riding upon a wave of rhetoric that the UK would leave the European Union, “come what may“, “do or die” and with or without a deal, on Thursday 31 October 2019. This was notwithstanding the fact that Parliament went on summer recess the very next day and will not return – unless recalled early – until 3 September, less than 2 months (in fact, just 45 working days), before the Brexit deadline. The European Parliament also took its summer recess on the same day, one last thing we have in common. Within days, the pound started to weaken.
However, at the time of writing, Mr Johnson had just completed his first overseas visit to another world leader, Germany’s Chancellor, Angela Merkel, where things perhaps began to look up and with it, the pound rose approximately 1% against the US dollar and the euro. Some believe that Ms Merkel shone a ray of hope on the UK’s fortunes at a press conference following the meeting, in telling Mr Johnson and the world that the UK and EU might yet find a solution to the thorniest and most polarising of issues in the Brexit debate – the Irish backstop (the last resort in the withdrawal agreement negotiated by Theresa May with the EU, designed to maintain a seamless border on the island of Ireland by aligning Northern Ireland to some rules of the EU single market to avoid the need for border checks) – and in just 30 days. Yet this is quite a challenge and, if not met and the UK leaves the EU without a deal on 31 October 2019, the backstop – unacceptable to Mr Johnson and Brexiteers alike – will not apply. The implications for the island of Ireland and the Good Friday Agreement are beyond the scope of this article. But what does all of this mean for prospective foreign investors?
Current state of foreign investments into the UK
According to the UK’s Digital Secretary, the UK technology sector has seen record-breaking levels of investment in the year to date – US$6.7bn between January and July 2019, the majority of which has come from America and Asia. Extremely positive, yet the broader picture is somewhat different. According to the UK’s Department for International Trade (DfIT), overall the UK has seen a decrease in the number of inward foreign direct investment (FDI) projects (i.e. investments from foreign investors into UK enterprises) every year since 2016. Of the three different types of FDI projects which DfIT measures, the largest decrease (-22% compared to 2017-2018) was in respect of expansion investment projects (where an existing investor expands by making additional investment), whilst new investments (where a foreign investor starts a new business) decreased by 12% in 2018-2019, compared to 2017-2018.
Notwithstanding this, investments are still being made. A weaker pound can draw foreign investors keen to get more ‘bang for their buck’. Indeed, in the months after the 2016 Brexit referendum result, the (at the time) largest acquisition of a European technology company occurred, when Japanese conglomerate SoftBank purchased the UK smartphone chip design company, Arm Holdings, for £24.3bn (US$31.4bn). However, for most foreign investors, a weaker pound is typically not necessarily good news, as it will impact their returns and the overall value of their investments.
UK General Election
On top of and linked to the Brexit issues, is the speculation about the next UK General Election. Labour leader, Jeremy Corbyn, is currently advocating for a vote of no confidence in the current government and for his appointment as Prime Minister of a caretaker government in the interim. My colleagues have written separately about the implications of a Labour government, specifically in terms of potential nationalisation and the impact on investors in companies which operate in the industries identified by Labour as likely to come back into public ownership under them (e.g. private rail companies, water companies etc.), that report can be read here. Whether Corbyn manages to propose a successful vote of no confidence in the current government is unclear, but the general belief is that the UK is heading for an early general election, before the close of the year. The identity of the Prime Minister and the composition of the government thereafter could change and will no doubt have an impact on the value of the pound and the UK economy more broadly.
Impact of Brexit on the economy
Prospective foreign investors may wish to understand the likely impact of a no-deal Brexit on the UK economy. The general consensus amongst economists is that it will not be good; some predict it will push the UK into a recession, others deny this would quite be the impact. Last month, the Bank of England stated that in a worst-case ‘disorderly’ Brexit scenario, “significant market volatility and asset price changes are to be expected“. The Bank of England’s view is that this could also lead to a reduction in “foreign investor appetite“, particularly in respect of commercial real estate and leveraged lending markets, two areas where the UK typically sees the most foreign investment.
However, it is not all bad news. Despite the current volatility, the UK still has a lot to recommend itself to foreign investors – competitive corporate tax rates; a fair court system and judges; low levels of corruption; an efficient labour market; and a burgeoning and exciting tech industry, to name but a few – though how much foreign investors are willing to gamble on a post-EU UK, remains to be seen.
Concluding remarks
It is clear that the next two months are crucial. Uncertainty is not attractive and does nothing for business or investor confidence. If Mr Johnson is to be believed, come 1 November 2019 the UK will be out of the EU. What happens next is still anyone’s guess, but of that there will at least and at last, be some certainty.
