Brexit – Planning for the post shock opportunities
Two months on and the global repercussions for politicians and businesses following the Brexit vote continue and remain daily front page news.
As the Brexit shockwaves diminish and the uncertainties which they bring become clearer, the challenges for all of us in business become more focussed; as do the significant opportunities for those businesses ready and willing to grasp them.
The summer break has provided the chance to draw breath and now is a good chance for businesses to take advantage of the opportunities that will arise in the economic and political landscape.
One immediate impact of Brexit was to reduce consumers and business confidence to record low levels. This led to a deferral of decisions on major expenditures and a focus on reducing costs and building cash balances.
Actions by the Bank of England in cutting interest rates and restarting quantitative easing; by the Government announcements on the timing and process of Brexit; and by businesses in the announcement of major acquisitions, such as Softbank’s £24bn acquisition of ARM, have helped dispel widespread fears of recession and supported the recovery in confidence in the UK economy.
As a result the expected collapse of sales activity in certain sectors, particularly housing, motor vehicles and consumer durables, has not materialised, and house price increases and consumer spending continue to rise, albeit at reduced rates from those before the June vote.
Consumer and business confidence remains subject to the uncertainties of the post-Brexit environment, but is proving increasingly robust, providing a platform for continued growth in the UK economy.
Increased confidence in the future of the UK economy has led to firmer prices and fewer opportunities to negotiate lower prices, as well as better deal terms than would have been available three months ago.
Certain markets are however open to negotiation and reduction including the upper end of the housing market, which has also been affected by substantial increases in Stamp Duty Land Tax, and the cost of acquiring businesses and capital investment to expand current operations. Prices in these sectors may firm up in the near future with increased certainty on the implications and timetable of Brexit.
Across most of the rest of the economy prices and inflation are expected to increase as the impact of the reduced value of the sterling takes effect. In light of these changes, businesses should keep a close eye on margins and consider their pricing and pricing structure.
Prior to Brexit, interest rate increases were being widely tipped to be expected in early 2017. It now looks unlikely they will increase above the Brexit level of 0.5% before the end of the Government in 2020.
The historically low interest rates in place for almost a decade fell even lower in August to 0.25% in base rate, and a further cut to 0.1% in November is still being considered.
The recent change will affect the cost of borrowing, with many mortgage rates being reduced and banks considering their loan pricing, although doubt remains in regards to the further impact of cuts in base rate on borrowing costs.
Reduced interest rates have also affected the return on savings, with the real prospect of the customer being required to pay to deposit money replacing the current negative real interest rates. Sources of investment other than savings should be considered by households and SME’s in the current environment.
Banks and financial institutions are also following up on their planning for the Brexit vote, including many that are moving at least some of their operations to EU centres such as Luxembourg and Dublin.
Others are reconsidering their expansion plans – with Virgin Money recently shelving plans to move in to SME lending – and still more looking for sources of additional revenue, such as charging for money on deposit.
Households and SMEs are also affected by the relaxation of monetary policy and the interest rate reduction to a new all time low, along with the relaxation of rules for banks lending of £150bn by the bank of England.
As a result, SME’s should consider their current and future financing requirements and the timing of approaches to financial institutions, as well as looking to alternative financing products and sources such as asset financing, peer to peer lending and crowdfunding.
The new Chancellor of the Exchequer has been not yet been in place for two months and is still formulating his proposed changes to fiscal policy.
No significant changes are expected before the Autumn Statement at the end of this year, however it is clear that the strict adherence to austerity will be relaxed.
The Autumn Statement is therefore unlikely to increase in taxes and may intend to provide tax reductions – with a cut in VAT being strongly tipped – but is likely to result in capital expenditure commitments which may range from HS2 and CrossRail2 to a resolution to the London airport question. What may remain unclear is whether there will be a new nuclear power station at Hinkley
Within the last year the Sterling has depreciated by over 15% against the US$ and the €uro, and by over 11% against the Chinese Yuan and many other Asia currencies. Market sentiment indicates this fall in value is likely to remain for the foreseeable future with the effect that the increased costs of goods acquired abroad will continue and result in higher price inflation.
For importers and businesses with significant overseas business elements, goods and services, margins should be reviewed and price increases sought with customers.
The devaluation of the Sterling also makes UK exports significantly more price-competitive in markets abroad, as well as adding margin to those businesses that already operate in foreign currencies.
The UK remains part of the EU for at least the next two years and exporting to this market should be considered, as well as to markets in Asia. We have several small firms which we have helped to open up in China in recent years with some significant successes. Further expansion into India should also be considered.
The reduced value of the Sterling will make UK investments more attractive for overseas companies, as has been clearly demonstrated by the recent acquisitions of Odeon/UCI by AMC Theatres of the USA, and South African Steinhoff acquiring Poundland as well as the sale of ARM to Softbank of Japan.
For those businesses considering an exit, consideration should be given to the attraction to an overseas investor, as well as the potential domestic acquirers.
It is still too early in the post-Brexit era to conclude on the continued success of UK plc in topping the growth charts. There are however opportunities for entrepreneurs and SME’s to secure their own successful future, and all businesses should be taking time now to consider their future in the wake of Brexit.