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In this week’s Commercial Awareness update, we discuss three key issues surrounding the triggering of Article 50, London’s IPO market, the collapse of a £21 billion merger and one hour contracts.
1. Brexit launched
In a week Theresa May triggered Article 50 of the Lisbon Treaty and started the formal process of leaving the EU, it’s hardly surprising the political and business press have focused on the implications for post-Brexit Britain. The Prime Minister sent a letter (full letter just here) to EU’s chief negotiator Donald Tusk, stating the UK’s intention to leave the European Union. There will now be a two-year process where the UK will aim to replace EU Law, negotiate a trade deal with the EU and decide a ‘divorce’ settlement with the Union. It’s been hard to avoid Brexit related news recently, but I wanted to pick out three related stories for this update.
Both the FTSE 100 and FTSE 250 had a 'up and down' Wednesday after May triggered Article 50, but ended the day trading marginally up – yet another sign the British economy is more resilient to Brexit than previously thought. Markets respond well to certainty, so more clarity around negotiations and the process is likely to have calmed speculators to some extent. The letter’s accommodating tone would have also encouraged stability.
This effect was emulated in the currency markets. The pound dropped slightly to $1.24 on Wednesday afternoon and €1.145 against the Euro, but was to recover by the time trading closed on Friday to €1.175. Unlike 23rd June 2016 – the biggest one-day fall in the pound's value – Theresa May’s announcement was completely expected, so the currency prices had already moved to reflect Brexit.
Ireland could be the biggest loser from Brexit
A report by the European Policy Studies found that Ireland, the Netherlands and Britain were likely to be the most harmed by Brexit. Researches highlighted the £1 billion worth of trade each week between Ireland and Britain as a key reason for these findings. They even went as far as suggesting Britain leaving the EU could harm the Irish economy more than Britain’s.
Irish importers are already seeing their revenues cut due to the weak pound and there are also worries about the UK’s corporation tax policy post-Brexit. Ireland’s corporation tax is set much lower than most EU countries at 12.5%, which has encouraged many firms to have headquarters in the country. The UK has hinted at lowering corporation tax (currently at 20%) to give global firms an incentive to stay in the UK after Brexit – this could nullify Ireland's advantages for many businesses.
Lloyd’s of London set for Brussels
Insurance firm Lloyd’s of London has announced it will set up a subsidiary branch in Brussels ready for when the UK leaves the EU. The new office is set to be operational from 1st January 2019, with the firm aiming to avoid any profit loss after Brexit. The insurers were keen to emphasise this was an additional office and fewer than 100 of 700 employees in London were likely to be affected. Both Dublin and Luxemburg were in consideration, but Belgium was chosen due to its pre-existing understanding of the market and pool of multilingual talent.
Many global financial services are also considering moving some of their operations outside of London to maintain their access to the single market, with Frankfurt, Madrid, Paris and others set to gain from Britain’s decision to leave the EU.
Questions to ask yourself… What are the advantages for global firms of remaining in London post-Brexit? Is the UK in a good position to negotiate a favourable trade deal with the EU?
2. London’s IPO market set for boost
The first three months of 2017 marked a poor quarter for London’s Initial Public Offering (IPO) market, as it recorded its lowest global share of activity since 2012. So far this year there have been 16 new listings on the stock exchange, worth a combined $2.2 billion. This represents just 6.4% of the global market share – compared to 16% in the same period last year. The USA and China have accounted for around 60% of the $34.6 billion total raised in IPOs this year.
The political and financial uncertainty surrounding Brexit appears to be having some influence over investor confidence. However, it’s not all bad news for London, as experts forecast a boost to the flotation market by the end of 2017. There are currently six big companies reported to have an interest in floating on the London stock exchange, with a combined value of around £30 billion. One of these is European logistics and warehousing company Logicor, who are currently valued at £11 billion.
Questions to ask yourself… Why is it important than London continues to have new companies wanting to float on their exchanges? Why could London be seen as a better place to do business than the USA or China?
3. Merger collapse
In the Commercial Awareness update five weeks ago, we discussed the possible pitfalls with the proposed merger between the London Stock Exchange and the German equivalent the Deutsche Boerse (see this update here). Last week, it was announced the European Commission has blocked the £21 billion deal which would have combined Europe’s two largest stock exchange providers. The Commission was concerned about the merger creating a monopoly for certain financial services, including the clearing of fixed income instruments (bonds and repurchasing agreements).
This is the third time a proposed merger between the two exchanges has been blocked by the European Commission. Many suggest the deal was always unlikely after Britain voted to leave the EU, with LSE’s refusal to sell Italian trading platform MTS the final deciding factor in the breakdown of the deal.
Questions to ask yourself… Will UK firms seek mergers with European companies to gain access to the single market? How will the European Commission effect Britain after Brexit?
4. The one-hour contract
A recent report has revealed the high-street bank Santander employs hundreds of their workers on a “one-hour contract” – guaranteeing the employee just one hour per month. There has been recent controversy surrounding big firms offering “zero-hour contracts”, with many politicians claiming they are unacceptable for workers in the modern day. Recently, a report found that almost one million people in UK have this form of employment.
These new “one-hour contracts” offered by Santander have raised questions as to how they differ from the former (apart from the 12 hours guaranteed each year). Santander claim they give employees full employment rights and are perfect for those who seek flexible employment, including students. However, they have recently made the move to change their job descriptions to make the details of the contract clearer to potential candidates.
Question to ask yourself… Should “zero-hour contracts” be banned in the UK?