Brexit impact on foreign investors

CONTACT HARLEY

The immediate aftermath of Brexit saw huge falls in both the value of the UK’s largest firms and the strength of Sterling, which was mirrored by even bigger falls in the value of European Indexes. As with any important economic event, Brexit produced swathes of uncertainty, exacerbated by the surprise result, which caused a number of market participants to exit in a bid to avoid risk. However, such economic events present unique opportunities for investors to exploit general overreaction of the markets and essentially, buy low and sell high. This benefit was realised when we saw UK indexes start to rise again shortly after, with the FTSE 100 now around 5% higher than pre-referendum values.

Now the dust has settled since the Brexit vote, the pound remains weak having hit its lowest level in 31 years. So what does that mean for foreign investment? Whilst the main determinant of UK foreign investment will always be the economic outlook – which at the moment remains quite uncertain – the weak pound presents an opportunity to invest at a lower cost in a fundamentally strong economy. Even in uncertain times, the UK remains one of the strongest and most stable markets around and while the pound remains competitive, it’s likely we’ll see it partly offset those other factors deterring investment. 

The economic fundamentals of the UK remain largely unchanged, reflected in the resurgence of the both the FTSE 100, 250 and the announcements from multi-nationals, such as HSBC, to keep their headquarters in London. Whether other firms suggesting a potential move will continue remains to be seen, but at the moment, we’re yet to see an exit plan in place and how trading and mobility will be affected. The UK currently receives the highest foreign investment among all EU member states, partly due to the access it provides to the single market whilst remaining a strong economy in its own right, however even without this, it continues to provide other advantages unaffected by Brexit.

Political instability has also become a by-product of Brexit, however the Conservative government have reacted quickly in installing a new Prime Minister, widely regarded as a positive force for the divided country, but also for future negotiations with the EU.

So how should foreign investors approach the UK since Brexit? With an undervalued currency, the UK’s typically high value residential market is now more competitively priced. It was widely expected, that to stave off fears of economic fall-out, the Bank of England would cut the base rate 0.25BPS to a historic low of 0.25%. In anticipation of this, we witnessed mortgage lenders competing to offer even further competitively priced rates, underpinning the availability of credit in the UK and the belief these institutions have in the housing market. Many are also moving into lending spaces they weren’t previously, such as limited company buy to lets, again pushing their ability to compete in a market that we’re being told is going to struggle following Brexit.

Amidst a fair amount of uncertainty in the market, and so far a lack of evidence as to the impact of Brexit, I assume the Monetary Policy Committee felt it best to hold off any expansionary monetary policy, to limit signals of any economic instability or reduced growth. Fears of economic damage should be abated until negotiations to exit have begun, with completion not expected until Q1 2019 at the earliest. Yet during the lead up, we should still see certainty in the market begin to increase and investment to remain stable.  

How does this all affect the housing market? With the chronic housing supply and demand imbalance continuing (especially in London), investors can feel assured that the UK has a buoyant property market, which is at a momentarily discounted price for foreign investors. Lower prices push demand, and assuming the pound remains competitive in the short run, we’re expecting a greater number of enquiries for foreign nationals purchasing in the UK, which may improve competition in that particular lending space of the market.

Regardless of Brexit, the London market will always be attractive to foreign investors, as it remains at the heart of global finance. The economy is fundamentally strong, and current uncertainty will merely provide those with confidence financial benefit in the long run. Those holding off for a more certain outlook may be waiting some time and missing an opportunity.