by Clement Thibault
Last Friday, the UK's Brexit referendum results showed the 'Leaves' had it, 51.9% vs 48.1% for 'Stay' in the European Union. Though there is likely a two-year unwind period ahead, filled with negotiations between the UK and the EU until the full 'divorce' will take effect, the initial fallout has been immediate and dramatic. The FTSE 100 plummeted and the GBP/USD tumbled to its lowest level against the USD in 31 years.
Indeed, London's overall standing as Europe's major financial hub is already being questioned. According to Bloomberg, Nordgold NV (LON:NORDNq), a Russian bullion miner, is reconsidering the exchange location of its primary listing. Though the company now lists in London, CEO Nikolai Zelenski said:
" If London's attractiveness will reduce, which is quite likely, we may look at other exchanges, like Toronto."
This isn't the only blow so far this year to the London Stock Exchange's standing or prestige. Bloomberg data suggests that the aggregate value of IPOs so far this year on the LSE is only a little over a third of the value of last year's IPOs, over the same period—$3.2B in announced IPOs this year as compared to $9B during the same period a year earlier. This massive drop is believed to be one early result of the uncertainty surrounding Brexit, hampering business and limiting initial public offerings because of the expected volatility.
A successful, high profile IPO on the LSE in the coming week—such as the one that was supposed to occur in early July for Telefonica's (NYSE:TEF) Telxius infrastructure unit and the subsequent possible offering of its UK-based O2 wireless unit—could have done a lot to ease market jitters and cement London's continued significance as a significant global financial market. Unfortunately, recent events have jeopardized this initiative.
The European telecom giant is said to be rethinking its strategy and may delay or downsize the stake of its business available for purchase. Should Nordgold or Telefonica decide against a LSE IPO, business sentiment regarding London could take an even bigger hit and an additional turn for the worse.
Existing agreements could also stumble. This past March, Deutsche Boerse (DE:DB1Gn) agreed to acquire the London Stock Exchange Group (LON:LSE), in a merger whose aim was to create the second largest financial exchange by market value. According to the plan, the combined exchanges will be headquartered in London, which made sense—at the time.
Now that the UK is heading out of the EU, questions are being asked as to where the combined company should be headquartered.
Germany's largest association of small investors called for the German government to either cancel the planned $30B deal or intervene in order to insure that the country's biggest exchange does not leave Germany for non-EU London. Both LSE and Deutsche Boerse said on Friday that Brexit will not change the merger plan, but according to the UK Telegraph:
"The Deutsche Boerse's works council, which represents employee interests, said the UK's decision...meant that Frankfurt should become the legal seat of the combined company, instead of London."
A shareholder vote on the merger will take place July 4th during a LSE shareholder meeting.
While the most of the issues mentioned above will be decided in the coming months, UK banking has already started to feel the pain. Barclays (NYSE:BCS) lost over 34% of its value since Friday morning, closing yesterday in New York at $7.03, down from Thursday's close at $11.18.
Lloyds Banking (LON:LLOY) Group (NYSE:LYG) shares have shed 35.9% of their value:
And the Royal Bank of Scotland's (NYSE:RBS) shares are equally depressed. Its stock closed down 37.3%.
Non-UK banks have begun planning to move their operations to the EU, after the ECB warned that the UK financial industry might lose its 'passporting' rights to the Union. JPMorgan (NYSE:JPM) Chief Executive Jamie Dimon said prior to the referendum that a Brexit could move as many as 4000 jobs from London to other financial hubs in Europe, or about a quarter of the company's employees in London. Major EU beneficiaries of this expected retreat out of London will likely be Dublin, Paris, and Frankfurt.
Can the UK stop what seems to be an inevitable loss of financial business? That depends. Undoubtedly, they'll try.
Britain could attempt to reinvent itself as the new Ireland by lowering corporate taxes in order to incentivize companies to keep—or set up—operations in London. Hefty relocation costs could also act as an inducement to maintain the status quo.
Ultimately, it will come down to the EU's decision regarding how it wants to conduct financial relations with the UK. Will the EU harbor a grudge against the UK and try to reclaim financial activity for its own members' cities? Several policy makers, such as François Villeroy de Galhau, France’s central bank governor, have hinted that it might.
Of course, that remains to be seen. Austen Chamberlain, a British statesman and Nobel Peace Prize winner, once said he was told of an ancient Chinese curse, 'May you live in interesting times'. While the curse's origin is in question, its relevance for London's financial industry certainly is not.