UK triggers Article 50 – Ongoing reactions

InvestmentEurope is gathering the reactions of asset managers and industry players across Europe as the UK government starts the process for Britain to formally leave the EU with the triggering of Article 50. Keep clicking back for updates.

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16.45 Eurizon’s Stefanini: ‘Not likely Brexit derails global recovery’

UK has activated the Article 50 EU exit clause on March 29. It’s not a surprise because it was officially announced before that they would trigger it by the end of March.

Now UK is facing a period of uncertainties about Scottish referendum, Northern Ireland, trade negotiations, etc. So we probably face a period of volatility on UK assets driven by news flow.

I expect that negotiations with EU will accelerate only after the outcome of French and German elections.

So far the Bank of England has demonstrated to be able to activate effective monetary policies to cope with potential negative impacts on UK economy and it stands ready to act in case the economy should weaken significantly.

Both UK and EU have interest in continuing cooperation and avoiding commercial wars that would be detrimental to both parties.

Finally we have to consider that Brexit is happening in a period sustained by global growth and it is not likely that Brexit derails this global recovery.

Filippo Stefanini, head of Hedge Funds & Manager Selection at Eurizon Capital SGR

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16.30 Portuguese fund selector view: ‘Probably everyone will lose’

The triggering of the Article 50 came out as expected. The British parliament respected the people’s will after all. The game starts now, and for those who believe the UK is on the weak side seating on the table with the EU, they are probably wrong. Sure, the UK will face an internal challenge, with new independence claims from Scotland, maybe from Northern Ireland too, but when they will sit down with the EU, facing their own internal problems with several extreme movements, from left to right wing in different countries, will they be in the position to give the UK a tough time? Really not sure.

More, while the EU doesn’t seem to have a plan to face  Brexit, other than ‘we will stick together no matter what’, even if more and more of the EU population is saying something else, be sure the Brits have been working on their own plan, in particular regarding the financial centre, which will probably be awarded a few additional incentives to keep working in London.

Of course at the end of the day, probably everyone will lose, it’s a bit like war, winners aren’t really winners. I don’t think that the UK is the weakest link, just remember that, after all these years belonging to the EU, Britain has always had their own balance, making it one foot in and the other out… always managing to have the edge they were looking for.

Rui Olo, head of Investments at ActivoBank

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14.20 ManCo structures & opportunities for funds post-brexit

It’s true that some US managers are looking at Ireland and Luxembourg and the opportunities afforded by ManCo structures. These structures are a tried and tested means by which fund managers can access Europe. The local ManCo is based in the European Union and handles the regulatory burden, while the US or UK domiciled manager markets the product and manages the portfolio.

In fact, we have already started to see this trend emerge. Because of this structure, however, there is no real need for managers to move wholesale operations abroad.

Fund managers are now looking at the opportunities presented by Brexit. Britain has an opportunity to create a new funds regime to challenge the rest of the world. Brexit also allows firms to create other products that can be distributed to non-EU financial centres. I would therefore expect stronger trading flows to develop with Hong-Kong, Singapore, Canada and India soon.

Julian Korek, global head of Compliance and Regulatory Consulting at Duff & Phelps

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13.36 UK insurance industry sees negotiations as ‘critical’

This is a seminal moment and one that marks the start of a process that is absolutely crucial for the UK’s future success. The next two years won’t be straightforward, but securing a deal that works for the UK and the EU 27 is in everyone’s interests. The ABI will be working hard to help the insurance and long-term savings industry overcome the challenges and grasp the opportunities offered by Brexit. To do this we must build on the last 40 years of regulatory, commercial and political partnership and find new ways to work, trade, travel and co-operate with our friends and neighbours in Europe.

Huw Evans, director general of the Association of British Insurers

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13.34 Headline risk is back

The triggering of Article 50 was well anticipated, but the fact negotiations are now live means financial markets may become more vulnerable to commentary from European and/or UK officials as to how well, or poorly, the initial discussions are going. Headline risk is back, if it ever really went away.

Michael Metcalfe is global head of macro strategy for State Street Global Markets

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13.30 Negotiations expected to start in May

We expect the formal negotiations between the UK and the European Commission to begin in May this year and Michel Barnier, the European Commission’s chief Brexit negotiator, has said he thinks the deadline to complete them has to be around October 2018. In terms of the scope of the negotiations, the first area which will be debated will be the “exit bill”, the cost of leaving based on the existing liabilities of the UK. This issue does have the potential to delay negotiations on other aspects, which risks both sides running out of time to, not only complete the negotiations, but also to come to a fair conclusion and therefore a settlement for the UK.

If no agreement is reached and they run out of time then we could find ourselves in a “Hard Brexit” situation. This would be the unilateral withdrawal from the EU, without any agreement on trade or any other aspect of the relationship. This is seen as a pretty negative outcome from pretty much all sides, except for a hardcore element within the current UK government. We believe it could potentially be quite damaging.

Moving onto World Trade Organisation rules would impose much higher tariffs than would otherwise be the case on goods. It wouldn’t cover services at all, so the difficulty of exporting services would become much, much greater. And it would lead to a very poor outcome for future relations, be it co-operation on security or other elements

Azad Zangana, senior European economist, Schroders

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13.25 Populism on watch

Investors should be braced for some sterling volatility but in my opinion it will remain range bound over the next few months.  Article 50 has been largely priced into the pound as reflected in extreme shorting positioning and I believe that any negative impact from negotiation noise will be offset by the Bank of England’s hawkishness as inflation rises further.

Looking ahead, initiation of the Brexit process indicates the reconfiguration of the EU has started.  The bigger question remaining for me is whether the EU chooses to take the role of conciliatory or confrontation as talks progress.

We should all keep in mind that the drivers behind the rise of populism and indeed Brexit are prevalent in many other EU member states, not just the UK.  If the EU can survive a crash free 2017 – politically and economically – then I think it gives the authorities precious time to arrest the rise of dysfunctional populism. In the meantime, all eyes are now on France, which is increasingly looking to go the Dutch way with polls suggesting rising support for the pro-EU candidate.

Salman Ahmed, chief investment strategist, Lombard Odier Investment

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13.20 WTO rules may rule

This leaves us with two main potential outcomes (both potentially hard): a free trade agreement (FTA) or a reversion to World Trade Organisation (WTO) rules. We ascribe a 50-50 probability.

The relative economic impact of the FTA or WTO outcomes depends on the extent to which an FTA would cover non-tariff costs to trade. Non-tariff costs to trade relate to regulatory compliance and proofs, other customs-related paperwork, competition policy, e-commerce policies, labour standards, intellectual property rights, government procurement policies and so on.

The biggest gains to membership of the EU have stemmed from the reduction of non-tariff costs to trade, although many still remain. We do not believe tariffs, which only apply to goods and not services, are particularly significant under WTO rules. The trade-weighted average tariff that would be applied to UK goods exports to the EU is just 3.3%. This has already been paid three times over by the fall in the value of the pound, and, regardless, most British exports do not operate business models that compete aggressively on price.

A reversion to WTO rules (which barely legislate for non-tariff costs) or an FTA light on the reduction of non-tariff costs would exert a significant drag on the productivity of the UK’s tradable sectors, deterring foreign direct investment and lowering the equilibrium exchange rate implied by the UK’s long-term economic fundamentals. On day one of Brexit, the regulatory regimes would presumably be very similar, so the costs of proving regulatory compliance may not be too large. But as the regimes diverge – which they presumably would, given the fervour around ‘sovereignty’ during the Brexit campaign – the costs would increase over time.

An FTA that does reduce non-tariff costs would significantly improve the UK’s prospects outside of the EU, particularly if the UK can also go on to agree similar FTAs with other faster growing economies. However, given that much of the benefit of being a member of the EU stems from these non-tariff costs to trade, it does not seem to be in the EU’s interest to offer up much in any resultant EU-UK FTA.

Ed Smith, Rathbones’ asset allocation strategist

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13.07 Significant structural change to economy

The negotiations around the withdrawal of the UK from the European Union have the potential to be the most significant structural change to the UK’s economy in a generation. Then again, the economic impact might be so small, we may not even notice. The degree of clarity around these issues is very likely to stay murky for some years yet, so rushing to judgement either way – from an investor’s perspective – is not a good idea.

Going into the UK’s EU Referendum last June, there were great prognostications of doom. The data shows that that simply has not happened and not much has changed economically since the vote to leave. We have had a labour market that has continued to grow, the unemployment rate is close to 40 year lows, while average earnings growth of households actually accelerated in the second half of the year. Therefore at this stage, there really is not any tangible evidence that there has been a meaningful response from the underlying economy.

Steven Andrew, M&G Multi-asset manager

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12.50 Points from UK prime minister Theresa May

Theresa May stood up around 12.30 local time out formally notify the UK Parliament that a letter had been handed over to the president of the EU Council Donald Tusk officially triggering the Brexit negotiations.

In her speech she outlined the objectives of the UK government going forward.

A so-called White Paper is to be published confirming UK government plans for the exit process. The jurisdiction of ECJ is to be removed from the UK. And the devolved administrations of Scotland, Wales and Northern Ireland will be strengthened with more powers as result of the Brexit, May said.

On a key issue, she said that the UK would seek to ensure rights of EU citizens in the UK and UK citizens in the EU “as early as possible”.

She also promised to build on existing rights of workers – answering a key concern expressed by the opposition Labour Party in regards to EU employment rules, which its members fear may be hollowed out once the UK is no longer part of the EU.

May promised that “We will negotiate as one United Kingdom”.

She said that besides the Brexit negotiations, the country would also seek to “strike trade agreements with countries outside the EU too”.

In the specific areas of science, education, research and technology, she said these were areas where she hoped to continue cooperation with “European partners”.

Noting that the UK government’s aim is “to deliver a smooth and orderly Brexit”, she acknowledged that “there will be consequences” from Brexit, including loosing influence over rules effecting the EU.

But she added that it was in the interests of both the UK and EU to deliver Brexit “with as little disruption as possible” and that the EU remains a “strong partner”.

“Europe has a responsibility to stand up for free trade for all our citizens,” May added.

May admitted that the Brexit referendum had been divisive in the UK, but argued that she would represent all Britons – whether pro or anti-Brexit – in the negotiations.

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11.47 Article 50: ‘Milestone’ of historic significance

Article 50 triggering is undoubtedly a ‘milestone’ of historic significance, but it is only the start of the next stage of the process by which the UK and the EU thrash out the terms of their ‘divorce’. There is a huge sum of money at stake and while the UK is demanding the ‘a la carte’ option of picking and choosing what it wants from the negotiations, the EU is sticking rigidly to a ‘set menu’ of fixed options.

Howard Cunningham, fixed income portfolio manager at Newton Investment Management

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11.40 Investors should stop being blinkered by politics 

The triggering of Article 50 has been well signposted and is only the starting point for a long period of transition. We wouldn’t expect markets to react strongly, or sterling for that matter, but instead to take this in their stride. In the wake of Brexit, they have proved to be very robust – there may be some short-term market jitters because Europe is taking an aggressive stance displaying their bitter reaction to the UK decision, but this will not last.

We stick to our message that investors should continue to focus on their long-term goals, stop being blinkered by politics and focus on the fundamentals – either by ignoring short-term performance wobbles or taking advantage of them by adding to their investments.

Michelle McGrade, chief investment officer at TD Direct Investing

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10.20 Pound under pressure on Brexit trigger day

The pound slipped against the dollar and the euro on Wednesday after UK prime minister Theresa May signed the letter that starts the process for Britain to formally leave the EU.

In the early hours of Wednedsay, sterling fell 0.52% against the euro to €1.145 and 0.49% against the US dollar to $1.239, although it began to make a slight recovery later in the morning.

With the official process of leaving the EU just started, currency market players agree the pound will likely remain volatile against the world’s major currencies.

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