Is unchanging Brexit sentiment changing the UK investment landscape?

In General News, Investment News, Management and Strategy, Thought Leadership by Cynthia VanzellaLeave a Comment

Investor sentiment towards Brexit remains negative overall, according to new data from onefourzero. With one year to go until the UK is set to leave the European Union, government efforts to reassure investors seem to have been largely unsuccessful.

In the nearly two years since the Brexit referendum, the British economy hasn’t fallen into recession as some predicted, but its growth has failed to keep pace with other OECD nations, growing just 1.5% in 2017, compared to 2.7% in the Eurozone and 3% in the US. However, investors understand that the UK market is different from the UK’s economy, and each sector has reacted differently as Brexit negotiations have evolved.

When considering UK’s potential for investment, onefourzero’s analysis of social media sentiment within the investor community in the past two years provides a contrasting trend. While investors remain wary across all businesses, particularly in the private equity sector, our data shows that the banking sector has been slightly more buoyant, despite some contingency plans by major banks.

After a year of sharp pessimism towards Brexit, the private equity sector has recently evidenced a very slow recovery of its confidence in the UK investment climate. It was notably influenced by developments last December, when Brexit talks finally showed some progress and moved to stage two of negotiations. During this time, the pound began to show a little recovery, especially against the US dollar, increasing confidence. Although recent news might reshape the trend in the next months, so far the overall net sentiment from PEs is still negative.

Venture capital, on the other hand, has fluctuated strongly in response to developments in negotiations. Early this year, research by investor Gil Dibner found that VC investment in the UK is actually higher than it was before the referendum, with an average of $1,145m per quarter, compared to $819m prior to the Brexit vote. The increase in the volume of deals (average of 69 deals per quarter after the referendum, against 45 before) indicates that VCs are still optimistic about the UK’s startup scene.

Despite some positive signs of resilience, it remains true that Britain’s economy is underperforming in light of current global growth. Alongside the Brexit uncertainty that persists over the business community, it is not surprising firms are considering it the biggest threat to investment decisions and confidence.

A recent report by IESE Business School shows that the UK could lose its position as one of the most attractive destinations for institutional investors in VC and PE assets, dropping from 2nd to 6th in the rank – behind US, Canada, Hong Kong, Japan and Singapore. The study considered economic activity, depth of the capital markets, taxation, investor protection and corporate governance, human and social environment, and entrepreneurial culture and deal opportunities.

Until now, the UK has always scored very high in many of these criteria, but the latest report predicts that Brexit will have severe consequences on the UK’s economic growth, trading with the EU and London’s supremacy as Europe’s financial hub.

Some international banks have already begun preparing to leave the capital. Goldman Sachs, that backed the Remain campaign and later reinforced its commitment to London as its main European base regardless of Brexit, has started its process of moving to Frankfurt. However, the bank is still investing in its new headquarters in London and, much like other US investment banks, hiring more people in the UK than in all the rest of EU. This, along with initiatives like Citigroup’s London Innovation Lab and long office lease extensions suggests confidence that London will remain the most important hub in Europe for investment banks for a while.

Chancellor Philip Hammond said, earlier this month, that London offers more to the financial industry than any other European city, in an attempt to prevent companies from relocating.  The perspective is that, while Brexit is a significant issue, it is not bigger than past issues such as the global financial crisis, and the UK business industry will ultimately adapt.

Last week, business groups celebrated an agreement between the government and the EU about a transition period after 29th March 2019, when Britain is due to leave the bloc. On what is considered to be one of the most decisive steps in Brexit negotiations so far, the agreement indicates that little is likely to change regarding trading until at least the end of 2020.

There is, still, a lot to be decided. While attributing all changes in the UK’s investment landscape to floating Brexit negotiations might not seem fair, it is definitely a key influence on sentiment. Until then, the consensus opinion is undoubtedly cautious for the next 12 months as uncertainty is likely to encourage companies to withhold significant investments in the UK.

To find out how onefourzero can help you identify opportunities for growth and potential risks, click here or contact fleur@onefourzerogroup.com

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