This article was produced by ELITE Connect and originally published on the ELITE Connect platform
We can’t begin to talk about 2016 without mentioning the UK’s Brexit vote in June. The repercussions of the public’s decision to end 43 years of European Union membership hit the markets hard and, with negotiations for Britain’s exit only just beginning, the complexity and uncertainty surrounding Brexit looks set to continue for the foreseeable future. So, 12 months on, what has the impact been on the macroeconomy so far, and what can we expect from the future?
For Matt Hall, co-head of UK corporate broking at Deutsche Bank, the Brexit vote is continuing to have a negative overall effect on the macroeconomy, and it’s an effect that shows little sign of improving any time soon, particularly in terms of its impact on investors. ‘We have seen most of the economic data points since the early part of 2017 come in worse than expectations and that reflects the more uncertain times we are living in right now,’ he says. ‘Clearly, the Brexit negotiations will become an even bigger theme in the coming weeks and months.
Hall also observes that ‘uncertainty is likely to affect consumer and corporate spending decisions during the negotiations more than [in the aftermath] of the Brexit vote’, adding that there are some market positives, despite the challenging environment. ‘Recently, we have seen the FX markets react around the Brexit narrative with the weakness in sterling translating to strength in the more internationally focused FTSE 100,’ he points out. ‘Having said that, some of the more UK domestic sectors like house building continue to outperform on strong demand dynamics, despite the Brexit overhang.’
Aarti Singhal, IR director at National Grid, agrees that the weaker pound after the Brexit vote has been a key factor in the current landscape: ‘Higher inflation and affordability are two interlinked issues, with implications for both investors and businesses. Following the referendum, a weaker sterling means higher costs for consumers, which puts the onus on companies to be more efficient in addressing affordability concerns that are at the top of the agenda.’
In terms of what the future will bring for the macroeconomy in the wake of Brexit, the international backdrop will play a significant part, and it’s not all bad news, according to Hall. ‘From a global and local perspective, you have to imagine it will remain volatile,’ he says. ‘The direction of the global economy will be more driven by actions in the US and China than by Brexit and we still see global growth of 3.6 percent in 2017 and 3.8 percent in 2018. For instance, our economists do not see the economic conditions in place that would suggest recession risks are elevated in the US for at least the next year.’
To deal with these macroeconomic issues, IROs need to ensure their messaging is clear and robust. ‘From an IR perspective, depending on your business model and geographic footprint, inflation can have a positive or negative impact and this adds a layer of complexity in the messaging to investors,’ Singhal comments.
‘My message to clients has been that you should keep as close as always to your shareholders and potential shareholders with a consistent message around your equity story,’ adds Hall. ‘Clearly, you must be conscious of these more volatile and macro-driven times but, over the medium to long term, companies shouldn’t alter their IR strategy around events they cannot control, and should focus instead on the long-term drivers of their own business.’
