How will Brexit shape Britain’s relationship with the continent?

Does Brexit really signal the end for globalisation?

The world changed forever on 23 June 2016, when the British public voted to leave the European Union (EU) after more than 40 years. The immediate fallout was extreme: global stock markets tumbled, while the pound plummeted to a 31-year low. Much of this initial reaction has since been reversed, with European stock markets including the FTSE 100 rebounding to pre-referendum levels. But with years of exit negotiations ahead, the Brexit effect is far from over.

Following are just two views on what is an extraordinarily multi-faceted subject. The picture may still be developing but it’s already time to “rethink Brexit”.​

The UK’s historic vote to leave the European Union opened debate in all parts of the world on the cracks in the philosophy of a European community. What impact does Brexit still to have on our markets?

Globalisation is good. Or, rather, it used to be. Britain’s “Brexit” vote to leave the European Union is making many rethink the liberal economic order.

Many Britons voted to leave the world’s largest trading bloc in protest at the free movement of people and money that they blame for impoverishing them and making it harder for them to find school places for their children and hospital appointments for their family.

Their action has encouraged others. Most notably in Europe and the US, where antipathy towards globalisation crosses the political spectrum.

As isolationist sentiment grows, its impact is beginning to be felt in the markets. One of the reasons why sterling fell in value by around 10% after the Brexit vote in June is that investors believe Britain will be a less competitive economy outside the integrated EU economy and the Eurozone. Beyond Europe, figures from the World Trade Organisation (WTO) show that export growth among developing countries fell to a meagre 1.3% in 2014 - a precipitous decline from more than 30% in 2010.

In July 2016 the IMF slashed its forecast for global trade growth for the umpteenth time. This year will be the sixth year in a row that world trade has been flat or falling as a share of the global economy - after decades when trade was rising faster than the world economy and the engine of prosperity for emerging market economies.

Small wonder that many are now calling time on an economic order that has endured since the latter half of the last century. Martin Wolf now questions whether capitalism and liberal democracy might turn out to be incompatible.

The good news for those who believe that free global trade is a long-term net win for trading partners and for global prosperity is that, while some western governments and voters may want to detach from an interconnected world, others are forging ahead.

WTO figures show that while overall export growth among developing countries may be slowing, trade between developing nations is rising sharply. Some 52% of developing countries’ exports went to other emerging economies in 2014 up from 38% 20 years ago. Trade between China and India was $1.7bn in 1997. By 2014 it had reached $72bn India’s total trade with Africa grew more than 60% in only four years, to almost $48bn in 2014-15

Chinese companies invested $111bn around the world in 2015 - more than ten times the amount in 2005, figures from the American Enterprise Institute show. The total that Indian companies have invested abroad - $139bn in 2015 - has risen 43% in the past five years.

What’s more, there are signs of a rearguard action by the liberal market brigade. French - yes, French - Economy Minister Emmanuel Macron has resigned from the government. The 38-year-old former investment banker is expected to run for the presidency under a pro-integration, pro open markets banner. Polls in France show also support for EU rising since Brexit vote. In the Spanish general election, that took place just after the Brexit referendum, support for the mainstream centre right rose, while the radical fringe lost support.

Perhaps the shock of Brexit has given the supporters of globalisation just the jolt they needed. It is some - small - comfort for “Bremain” supporters if their loss turns out to be globalisation's gain.

Lombard Odier’s Chief Economist Samy Chaar believes the short-term impact of the Brexit vote on global stock markets has already been erased, but that the ongoing uncertainty is a serious risk. What impact has the result of the European Union (EU) referendum had on European stock markets?

What impact has the result of the European Union (EU) referendum had on European stock markets?
Global markets all went down on the morning after the vote. However, if you look at any European index now, they are all trading back at above June levels. In other words, the effect has been completely erased.

What impact do you expect it to have longer term?
Europe currently provides 50% of foreign investment into the UK, so Brexit could be a real game changer for the UK economy. European markets may also be affected if other EU countries vote to leave the union, but this seems unlikely at this stage.

Does Brexit threaten London’s status as a financial hub?
The short answer is yes. Of the 400 major banks in the City, more than two thirds are foreign, and a big chunk are there to operate in Europe. However, cities such as Paris and Frankfurt are not ready to replace London as Europe’s main financial hub. So it is not the end of the City as we know it.

Do you believe Brexit will have political ramifications elsewhere in the world?
Internationally, anti-establishment sentiment is pushing people towards political extremes. But while there is exasperation with the EU in other European countries, these countries have stronger ties to the union, not least because they have the euro. Even in Italy, there is little appetite to return to the lira.

What do you expect to happen to UK interest rates?
Short term, I do not expect UK interest rates to change. However, sterling has taken a hit and the UK has very little manufacturing. The higher cost of imports will therefore drive inflation, creating another problem for the Bank of England.

What effect will Brexit have on real estate in the UK?
Lower interest rates are good news for property investors – and the depreciation of the pound acts as a cushion. But the prime London property market is dependent on investment from Europe, Russia and the Middle East. So there is vulnerability, especially as these properties are so overvalued.

What are the biggest risks facing investors during the exit negotiations?
Uncertainty is the undoubtedly the biggest issue for investors at this time. It’s going to be a long process and, for the UK, a lot depends on the economic model put forward by Theresa May. We should have a better idea of what she is planning after the Autumn Statement on 23 November 2016.

What can investors do to protect themselves against the risks linked to Brexit?
Investors should think on a global scale and seek exposure to countries that will not be impacted by this issue. Emerging markets are one example of this. They are volatile, but could provide a 6% yield. Our view is to have a well-balanced portfolio that preserves your capital and gives you a little something on top.

What investment opportunities may arise from Brexit?
One possibility is that, as the balance of power in Europe shifts, the Eurozone – rather than the EU, which is bigger and less flexible – will wield greater international power.

IMPORTANT INFORMATION – GENERAL MARKETING
This is a marketing communication issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter "Lombard Odier"). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This marketing communication is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe, to purchase, sell or hold any security or financial instrument. It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information herein contained do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the marketing communication or otherwise review it with your external tax advisors.
Some investment products and services, including custody may be subject to legal restrictions or may not be available worldwide on an unrestricted basis.
Investments are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.
Past performance is no guarantee of current or future returns, and the investor may receive back less than he invested. The value of any investment in a currency other than the base currency of a portfolio is subject to foreign exchange rate risk. These rates may fluctuate and adversely affect the value of the investment when it is realized and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.
European Union Members: This marketing communication has been approved for issue by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: France: Lombard Odier (Europe) S.A.• Succursale en France, a credit institution and regulated in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities. United Kingdom: Lombard Odier (Europe) S.A. • UK Branch, a credit institution regulated in the UK by the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.
Switzerland: This marketing communication has been approved for issue by Bank Lombard Odier & Co Ltd, a bank and securities dealer authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).
United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
This marketing communication may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.
© 2016 Bank Lombard Odier & Co Ltd – all rights reserved