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Brexit and the City

06 September 2017

Orchard Street argues that London’s combination of business advantages make a mass exodus of financial workers highly unlikely.

In the wake of last year’s referendum result, it didn’t take long for financial centres in other parts of Europe to start selling themselves as an alternative to London.

Given EU rules on market access, it is expected that global banks and financial businesses will need some kind of presence within the remaining 27 member states of the European Union. Indeed, it looks perfectly plausible that they may not be allowed to locate their EU headquarters in London.

No wonder some financial centres began to spy an opportunity in the UK’s forthcoming departure from the EU. A few leading alternatives quickly began to emerge – and each has its own selling points.

Frankfurt is home to the European Central Bank and the second-largest European financial district outside London – Morgan Stanley, Citigroup and Standard Chartered have already chosen it as their new EU base, while Goldman Sachs, HSBC and UBS have between them pledged to shift several thousand staff there.

Meanwhile, other European cities are making their own pitches. Paris has obvious star appeal as a city and a pro-business new president; Dublin already boasts the European corporate headquarters of several global giants (notably Microsoft, Google and Facebook) and a low rate of corporation tax.

Other cities with strong financial centres hope to poach companies too: Amsterdam has a dynamic ‘fintech’ (financial technology) industry, while Luxembourg is a long-established centre for asset management and insurance. Like Frankfurt, Paris and Dublin, each has been proactively touting its wares since the Brexit result was announced on 24 June last year.

Big Bang

All this activity could make the guardians of London’s Square Mile nervous – likewise for Canary Wharf. The City has been a financial centre for centuries, but its current status as global and European financial powerhouse dates back just three decades to the policy-induced ‘Big Bang’ of 1986.1 And for all of that time, the UK has been part of the EU. Could the City now lose its crown?

“If Brexit wobbles and negotiations go awry, then, among all the sectors of our market, it’s the City that is likely to be most heavily impacted,” says Philip Gadsden of Orchard Street Investment Management, which runs the St. James’s Place Property fund. “At the moment some of the banks in London are creating European hubs outside the UK – which may be the minimum they are required to do by the EU after Brexit.”

There may be method in their caution. To catch a glimpse of where London stands globally as a financial centre, it is worth looking at the biannual Global Financial Centres Index (GFCI), a competitiveness ranking based on a considerable array of factors – not just the maturity of the business environment and financial sector, or the tax and regulatory backdrop, but also such variables as the availability of educated labour, the quality of public transport and even quality of life.1 In the latest report, London retained first place, marginally ahead of New York.2

When it comes to the future of European finance, however, Continental Europe’s financial limitations are perhaps just as significant as London’s strength. Zurich and Geneva take 11th and 20th spot respectively, but neither lies within the EU. After London, the next EU destinations on the leader board are Luxembourg in 18th and Frankfurt in 23rd place – down four places from the previous report. Other EU cities to feature are Munich (in 27th place), Paris (29th), Dublin (33rd), Amsterdam (40th), Warsaw (41st) and Tallinn (42nd).3

“The reality is that Frankfurt is years behind London in terms of financial services infrastructure and skills,” says Gadsden. “If you’re looking to raise capital and to list, you look at London or New York long before you consider Frankfurt. London has the accountancy firms, the law firms, the regulatory structures and - importantly for fintech companies - is close to several world-class universities. There are as many people just in financial services in London as there are living in central Frankfurt.”

Nevertheless, some commercial property investors have turned more cautious towards London since the referendum result. Although glass megaliths like the ‘Cheesegrater’ and ‘Walkie Talkie’ have been sold recently to Chinese investors at sky-high prices, many real estate investment trusts are currently trading at a large discount to their net asset value,4 as property valuers become more fearful.

Evolution

Moreover, while the focus remains on banks, the reality is that commercial property demand in London since the referendum has been driven by technology and media companies, not financial services. Google’s new ‘landscraper’ office in King’s Cross will provide space for more than 4,000 employees, while Facebook announced last November it would increase London staff numbers by 500.

“Firms that might have typically been in the City 20 years ago can today be found in the West End, Victoria and beyond,” says Gadsden. “If space does become available in the City, the fintechs east of Old Street are bursting at the seams. We believe they’ll take up any slack space in the City. Many of these firms are small but have the potential to grow quickly – and will probably choose London when they need to raise capital.”

Within financial services it remains to be seen just how large an exodus London will face – and whether European companies will be willing to sacrifice proximity to London’s capital markets and broader market infrastructure and services. Moreover, as a quick glance down the Global Financial Centres Index makes clear, the City’s chief competitors are not so much Frankfurt, Paris or Dublin as New York, Singapore and Hong Kong. A bet against London is a brave call.

“The idea that all of Goldman Sachs is going to move its entire London operation to Frankfurt is simply wrong,” says Gadsden. “While Hong Kong and New York may be viable global alternatives, other European cities don’t even come close.”

 

Orchard Street is a fund manager for St. James’s Place.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The opinions expressed are those of Philip Gadsden of Orchard Street Investment Managers and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.

 

1 Source: https://en.wikipedia.org/wiki/Big_Bang_(financial_markets), accessed 6 September, 2017
2 The index draws on data from the World Bank, OECD and Economist Intelligence Unit, among others. It is published twice a year by Z/Yen Group and sponsored by the Qatar Financial Centre Authority.
3 GFCI 21, March 2017: http://www.longfinance.net/images/gfci/gfci_21.pdf
4 As above
5 Source: http://uk.businessinsider.com/london-commercial-property-prices-post-brexit-2016-11

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