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Brexit’s Impact

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With uncertainty
looming over the
impact of Brexit,
Modwenna Rees-
Mogg calls for calm
in the face of a
distant storm. While
it is expected that not much will
change between now and 2019,
there are a few things to be mindful
of and it would be wise to prepare
for some major changes ahead.

 

It’s less than three months until the UK Prime Minister has said she will trigger the first step in Brexit by giving notification under Article 50 of the Treaty of Lisbon.

The UK Referendum is part of a wider trend in the West of national populism taking on the liberal metropolitan globally minded Establishment – fortunately using the ballot box rather than violence – and winning. So, when it comes to discussing the impact of Brexit at a macro level, entrepreneurs and investors alike should expect the impact of this trend to take effect elsewhere. The elections in the Netherlands, France and Germany in particular will help us to see how this theme is developing in Europe. From a global perspective it’s worth noting that there are national elections all over the world in 2017 from Ecuador to New Zealand and of course the Turkish Constitutional Referendum in the spring. By the end of the year a truly new world order may be in place.

The gentle tidal impacts on the quoted markets could become tsunamis as you move into private and then small private equity markets.

It is right to be concerned about the mountains of debt across governments and individuals and negligible interest rates. The doomsayers are out in force; equity markets reaching new peaks inevitably leads to predictions of terrible crashes.

Crashes in the “big” markets do, however, lead to collapse in their little brother and sister markets so we must take note. But against this is the pressure on those with cash to invest it safely for a decent return. Terrorism and war which are, in pockets, causing misery, destruction and worst of all death of the innocent, are horrible but not currently impacting on the world economy to any large degree.

“If borders close, we can expect to
see those immigrants find new homes
and it is there where the largest
opportunities will now be born.”

On balance though I think it’s more likely we will stick with the status quo for now rather than see a massive calamity of the order of 2007/8.

When it comes to the Brexit “hard” rather than “soft” exit is now more likely, so there will be a sharp change in 2019 rather than a gentle transition. With two year’s notice businesses can now start to plan for that likelihood. Whilst in some areas costs will rise (not least tariffs), in others new opportunities will enable early stage investors to make money in e.g. “BrexitTech” (border control technology etc.). Restriction on the free movement of people will, if anything, spur technological innovation to replace the bodies lost in the fi elds and factories.

But for now and until March 2019 it is important to note that on a day-to-day basis NOTHING has or will change. The UK will continue to be part of the EU and all that this entails for another 26 months. In that time many companies will start, grow and exit or shrink and fail, whilst those already on their growth trajectory will carry on. Others, by then, will still only be in the research or start-up phase with an exit years away. The best strategy is to keep on investing. Companies selling services which help companies to deal with the impact of Brexit are a defi nite buy!

Brexit’s impact on different sectors and geographies is going to vary. In the US, Mr Trump’s presidency will have more impact, but the City of London is right to worry that business such as international settlements may remove itself not to continental Europe but to New York, leading to less business being done in both the UK and the EU. We need to listen to experts when they express concerns that in the short to medium term new trade opportunities between the EU, the UK and the rest of the world may not compensate for trade lost, damaging the GDP of many nations, not just those at the centre of the storm. Taking a 10 year view, however, it is almost inevitable that new trade opportunities will more than compensate, despite the uncertainty on the way.

Uncertainty creates opportunity for the brave – if those investors who are known to have the greatest appetite for risk (angels and venture capitalists) hold their nerve, the opportunities are endless and global. I anticipate that cross border investment will rise all over the world, but especially between fi rst world countries on the one hand, and second and third world ones on the other. The challenge will be preventing a rise in Protectionism, but Luddite domestic businesses will die whether we are Protectionist or not.

Traditionally, the US, the UK and Israel have been seen as the leaders in innovation in the early stage investment market as well as in technology. So a change in the world order from Brexit matters. A common theme is that innovation is and has often been created by immigrants.

If borders close, we can expect to see those immigrants fi nd new homes and it is there where the largest opportunities will now be born. A new centre of innovation and therefore investment may now emerge perhaps in an open minded Far Eastern, South American or African country which wishes to seize the opportunity. The message to investors in the UK and US in particular is to look abroad for deals, you cannot afford to stick to your domestic market any more. And for trusted deal fl ow you will need to befriend investors already based in those markets.

Where the investment money is to be found will change too and this is truly uncertain. For example, will the UK government create an equivalent to the EIF, if UK venture capitalists can no longer obtain funding from the latter? Will border controls and tariffs restrict fl ows of investment capital? In the absence of political leaders creating the right strategies especially in funding for early stage investment, investors might consider place pots of money abroad and entrepreneurs would be wise to befriend the private sector as soon as possible.

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