Viewpoint: Richard Borysiewicz

Inevitably there will be a certain degree of speculation around this question for quite some time, as it will take months or perhaps years before the new UK-EU relationship will be finally defined. During this period of uncertainty, the markets are expected to experience consistent volatility, as investors will be increasingly wary about taking risks, with the focus on protecting interests and returns.

From an asset allocation point of view, it means that people will be less inclined to invest in equities – as they are perceived to be a riskier asset – and more likely to tap into safe havens like US Treasuries, even if the yields may be negative as a result of increased global interest. However, investors need to put money somewhere, and this state of affairs will certainly have a knock-on effect on various financial institutions in the long run, including UK and European banks. The other risk will be around the political implications of a possible breakaway movement in Scotland and Northern Ireland. Again, this is only speculation at the moment, but it will certainly bring added volatility to the markets. This instability seems to be quarantined in the UK at the moment, but contagion may well reach other European countries, certainly financially, given how thoroughly interconnected the global economy is nowadays.

Guessing for how long the negative effects will persist is an impossibility at the moment, but it would be very beneficial for the markets to hear as many details as possible about the outline exit plan. One wishes that it had been clarified during the pre-referendum period to assure market stability. On a different note, it will be interesting to see how trade within the EU will be affected by the referendum, considering that as much as 50% of the UK’s trade, which continues to be the world’s fifth-largest economy, remains with the EU, and what sort of opportunities it could create for other economies worldwide, including the Asia-Pacific region. Having said that, trade barriers going up between regional blocks is rarely taken well by financial markets. The investments that poured from richer countries in the EU, including the UK, to less developed ones in the years after the Second World War, were used to make the latter more prosperous, and the mutual benefits of an integrated EU have greatly helped this part of the world.

From a purely financial standpoint, while London will always remain one of the world’s financial centres, as traditionally it has functioned as a springboard for the rest of Europe into the international markets, especially the US, the UK exit will create a set of brand-new opportunities for the rise of second-tier financial centres with greater aspirations. Frankfurt and Paris, for example, which will benefit from the presence of large banks and fund managers operating from there, had been sort of overshadowed by London in recent years.

As diversification is the best solution against volatility and risk, it is also to be expected that the heads of large global banks will move some of their assets away from London and place them somewhere else in the near future. Financial services employs a large part of the professional workforce, but also creates plenty of synergies with other industries, such as construction, transport, hospitality and infrastructure, to name a few. If the growth of the industry will slow down in the years to come, so will the capacity to generate new job opportunities. Again, it would have been positive to hear more specific plans from the pro-exit contingent on how to shore up financial services in the UK, perhaps through tax schemes or new bilateral agreements with countries like the US.

On the brighter side of the story, one could expect that the UK exit will function as a catalyst for the EU to implement some of the reforms that could transform it into an efficient, functional organisation instead of a loose confederation of states, as it is currently perceived by several countries within the union.