The implications for investment flows: Brexit

The uncertainty surrounding the ‘Brexit’ vote in the recent EU referendum is having an impact across all sectors. Mark Bamber looks at how this is affecting the flow of investment.

At the moment, the major political parties in the UK are passing through painful and eventful leadership changes, the Pound has been weakened in the currency markets, and the Brexit decision itself is being questioned. Uncertainty reigns, and volatility is a plausible future scenario.

I see the British consumer as one of the key protagonists in the post-referendum Brexit scenario. Pension pots may be affected by the turmoil, earnings may be coming under pressure, a weaker Sterling and rising inflation will erode purchasing power. This, coupled with potential negative impacts on property prices, and the prevailing uncertainty, could be a recipe to slow consumption expenditure to a glacial pace.

Domestic investors are the second key protagonist in this scenario. Anecdotal reports in the media indicate that firms may have postponed investment and employment decisions during 2016Q2, pending the outcome of the referendum. Further anecdotal media evidence now points to continuing postponement of key decisions, while companies seek to assess the implications of the new reality at a time when there is still insufficient information about the future.

The British government and regional leaders are the third protagonist. At a national level, the leadership changes in the two main political parties have focused attention on internal party processes and succession rules, whereas the Scottish administration admirably seems to have been primed to hit the ground running after the referendum result. Even so, the politics of Scottish relations with the EU, and of Scottish reactions to the changes in Westminster, will be absorbing major shares of government focus, resources and time, such that the pace of decision making on the ordinary business of government, both at UK and at Scotland level, may be slowed. Necessary decisions on major infrastructure development and contracts may be delayed, putting pressure on investment and economic performance.

Foreign investors become the fourth category of interest. Here, I would subdivide foreign investment between new or continuing investment in greenfield projects in England or in Scotland, from foreign direct investment that relates to flows of finances in the context of international transactions or financial structures, typically passing through the City of London. I would expect that “headquarters investments” would be significantly more resilient, a commitment to a UK-based greenfield investment, in particular one that is already in progress, will be buffeted by uncertainty but is likely to proceed, albeit with some delay.

Investments focusing on export-driven manufacturing could encounter more significant delay due to the prevailing conditions. Uncertainty in this regard is likely to weigh more upon corporate decisions, and to last longer until there will be sufficient clarity as to the nature and implications of Britain’s future trading relationship with the European Union and with other major trading partners. There are likely to be a few casualties, and there will be some investment projects that are siphoned off to other countries. I would expect investment flows that are driven by international transactions structured through or by the City of London to proceed, until such time as any real, longer-term implications of Brexit upon the operations of the City become clearer internationally.

Uncertainty is the critical problem driving most of the instability with regard to investment outlook. The sooner the current situation stabilises - ideally in an internationally positively-regarded manner - the better. At a regional level, the authorities in Scotland would be well served by imparting confidence, and emphasising Scotland’s short-term eagerness to do business and a longer-term vision of stability and prosperity.