Brexit is undoubtedly one of the current events most followed by investors which is totally understandable. It’s clear that this event will have a strong influence on the majority of the financial markets and stock markets and it is therefore extremely important to understand how to interpret the related information to benefit by taking the correct positions on various market assets. In this article we will examine the direct consequences of Brexit and how you can incorporate this knowledge into your online trading strategies.
Firstly, to better understand the mechanics of Brexit it is necessary to examine the reasons that have persuaded the British to opt for this solution that is often considered as an extreme move. Firstly we note that Brexit is the direct consequence of a referendum of which the debate was centred upon the subject of the United Kingdom’s sovereignty.
Among the arguments put forward by the pro-Brexit party we particularly note the desire to resume more control over immigration into the country. The second most popular point is that of the supposed cost to the country of belonging to the European Union. And finally the third major argument for Brexit is that of the strict regulations imposed by the European Union which are perceived to be prejudicial for the United Kingdom.
However even if the benefits for the United Kingdom through Brexit are clear, opponents to this change are quick to point out certain problems that the country will have to face. For example, in the case of Brexit the United Kingdom will lose its access to the single market which is significant as obviously this is a major economic source, both in terms of time and money, for merchandise and for people. We also note that withdrawing from the European regulations represents a significant cost for the United Kingdom as this will require the creation of new administrative procedures and controls.
To summarise, numerous economists that have examined the Brexit details estimate that the United Kingdom will lose overall by adopting this drastic measure, even with the hypothesis that it will obtain consent to these agreements.
One of the most important factors to take into account if we wish to accurately analyse the impact of Brexit on the stock markets concerns the position of the United Kingdom relative to the stock markets in the other European countries. It should be remembered here that the London financial market is currently considered as the most important in Europe. Brexit will certainly lead to a loss of this status as well as a decrease in the size of this financial marketplace of around 15 to 25%, notably due to the loss of a European passport. This is because by withdrawing from the European Union London will no longer be able to directly access the European financial markets.
This also brings us to reflect on what appears to be somewhat of a paradox. The creation of the single currency, the Euro, has contributed in the past to strengthening London’s financial standing as number one in Europe even though the United Kingdom kept its own currency, the sterling pound. London is currently the financial capital of Europe, and always has been, and this is why Euro based financial activities are concentrated there through the European passport. However, all activities that are moved from London towards other European capitals will have a positive effect on these European countries.
Certain analysts and economists have also mentioned the hypothetical creation of a new tax haven for the United Kingdom companies but others decry this possibility for various reasons. Firstly, this possibility would incur a significant reduction in the tax revenue of the country and therefore a budget deficit. But we also know that the United Kingdom cannot allow a deficit of this size if it wishes to continue to finance itself on the sovereign debt market.
Also, this tax haven status would not solve the problem regarding the European passport. Therefore, even with significant tax advantages, a business based in London would not be able to access the European Union markets.
Of course, the United Kingdom is not the only country that will be directly or indirectly affected by Brexit. The European countries will also be influenced by this event with a slightly different impact on each country.
Regarding the trading in merchandise, the European Union is actually a member of the World Trade Organisation and therefore merchandise can be freely moved around.
With Brexit, the United Kingdom will have to renegotiate everything with the European Union as well as all member countries of the World Trade Organisation and, in accordance with the new agreements it is therefore possible that there will be, over the long term, many manufacturing companies that move from the United Kingdom to other European countries.
This will particularly concern the financial services sector. In this case we note that the large financial marketplaces, who are candidates, as well as the banks and insurance companies are carefully monitoring these possibilities. These places notably include Paris and Frankfurt but also Amsterdam, Dublin and Luxembourg to a lesser extent as these relate more to specific and specialist activities.
These changes planned for over the long term should create activity, employment and supplementary revenue for certain economies. We therefore expect a generally positive impact on the growth of the countries concerned.
Among the financial marketplaces and economies of the European Union one of the best places to benefit from Brexit is of course the Paris stock market. This financial marketplace benefits from numerous advantages but also, as we shall examine further here, has certain disadvantages that would need correcting.
Concerning the principal advantages that France offers we note for example that it is the only European financial marketplace that collectively offers all the financial activities in one place, whereas Germany for example has the Fin tech activities in Berlin but the insurance activities are in Munich.
The fact that Paris is a large city like London and New York also offers numerous employment possibilities, notably for spouses and partners. For example it offers plenty of space for the opening of offices and the numerous international schools in Paris should not be overlooked.
Concerning the disadvantages of this financial marketplace we can particularly note the strong rigidity of the workers’ rights in France and the complexity too of a tax system which is often unstable and varies according to financial laws. These two elements could be causes for anxiety with foreign companies. We are also unhappy to note the high level of social security contributions for activities which have a high added value thereby contributing to a significant increase in costs.
Therefore, before taking position on the popular assets of the CAC 40 it is important to take the time to really reflect on the appeal of France as a direct consequence of Brexit and consider solutions that would enable the French economy to attract investors from the United Kingdom. We would therefore attentively follow all projects that concern changes in workers’ rights and taxation such as the El Khomri law did in 2016 and which seem to positively influence the larger foreign investors towards France. Of course, we would also recommend monitoring a decrease in the corporation tax which would also be a necessary element for the appeal of this country for investors.