Brexit Wins, But At What Cost To British Firms?

As Britain voted to leave the European Union (EU), the British Prime Minister David Cameron announced his resignation. The European project of greater unity that was conceived from the ashes of World War 2 also received a deathblow, making this the most significant historical moment, perhaps of all times.

Of course, a Brexit poses serious treats to the British economy. While Britain’s banks took a $130 billion battering, with Lloyds (LON:LLOY) and Barclays (LON:BARC) PLC (NYSE:BCS) getting hammered the most, tech majors are also subjected to disappointment. Most of the tech majors were for “Bremain” as Britain’s tech firms need unrestricted access to the European market in order to compete efficiently. British firms will now face skill shortage, regulatory headaches and less investment on top of rising borrowing costs that they had to bear because of the uncertainty ahead of the referendum on EU membership.

Bank of England and the European Central Bank have promised to protect markets from Brexit panic by injecting liquidity if required, but, for the time being the global markets are subject to fresh bouts of volatility and one hardly expects Britain to be spared.

Britain Votes to Leave European Union

British voters have decided to leave the EU, a stunning development indeed! Market pundits had warned that a Brexit will negatively affect financial conditions and the global economy. Fed Chair Janet Yellen had said that such a move would “usher in a period of uncertainty” and fuel volatility in world markets. We have already witnessed the pound crashing to its lowest level since 1985, with the sterling falling below $1.35.

The “leave” campaign secured around 51.8% vote, while the “remain” camp received 48.1% vote. England overwhelmingly voted for Brexit, but, Scotland and Northern Ireland backed “remain,” indicating a split down the middle. Those who campaigned for Brexit must be on cloud nine as the U.K. escaped EU’s shackles and are now in a position to utilize its full potential as a thriving economy. However, we shouldn’t forget that such a vote goes against common wisdom of economic prudence and the redoubtable opinions of notable economists.

Brexit to Hamper Britain’s Economy

As U.K. opts to leave the EU, their future relationship hangs in the balance. Spanning across 28 countries and encompassing more than 500 million consumers, the EU is Britain’s biggest trading partner. About 75% of British firms that trade goods globally do so with the EU. Access to a single market has helped British firms expand their business.

But, a Brexit will now push Britain’s economy into a recession, resulting in a drop of 3.6% in GDP and around 500,000 job cuts. U.K also stands to lose other essential benefits including free movement of goods, services, capital and people. Moreover, U.K. won’t be able to tweak or play a significant role in influencing the laws of the single market.

Cameron had earlier cautioned that a potential Brexit will adversely affect British spending on healthcare. He forewarned that Brexit will dry up around 40 billion pounds in U.K. public finances by 2020.

Britain’s Financial Sector Faces the Axe

Financial services that account for almost 10% of the U.K’s economic activity will largely be affected by the vote. Around 2.2 million financial industry workers face years of uncertainty. Many also fear the risk of job cuts, as London’s status as Europe’s premier financial hub is now at stake. All international and British banks had warned that they could move thousands of jobs if Britain opts out of the EU.

Morgan Stanley (NYSE:MS) had said that it could move around 1,000 of its roughly 6,000 employees currently in Britain to the EU. The CEO of rival firm, JPMorgan Chase & Co. (NYSE:JPM) , Jamie Dimon told staffers that the bank “may have no choice” but to overhaul its UK business model, casting doubts over its 16,000 workforce.

Job security fears climbed to levels unseen since the 2008 financial crisis, which has made the mood somber in the high-rise banking hub of Canary Wharf, home to banks such as HSBC Holdings (LON:HSBA) plc (NYSE:HSBC) and Barclays. (read: Are U.S. Bank Stocks Fated for a Huge Fall Post Brexit?)

Brexit to Hurt U.K. Tech Firms

U.K. leads the tech firm industry in Europe and so it isn’t surprising which camp they were for. Their allegiance was further cemented by EU’s move toward a single digital market. They are now in the process of making sure phone users can enjoy movement from member state to member state without having to pay roaming fees.

Such policies have become popular with U.K. network operators as they believe EU membership is good for their business. BT Group plc (NYSE:BT) has clearly mentioned that the company’s prospects are better if the UK stays in a reformed EU. Many of U.K.’s unicorns favor a EU membership, according to a report published by The Guardian in May.

But, now they are in for a shocker. A survey of U.K.’s tech workers by Juniper Research has found that seven in ten believe a Brexit will have a negative on the tech industry and U.K. will find it immensely hard to lure and employ individuals from the EU countries. (read: Tech firms reel from Leave's Brexit win)

Bottom Line

As discussed above, Britain’s decision to leave the EU has dropped a bombshell on two of its major sectors, finance and technology. Energy and big auto companies are also expected to fall victim of Brexit. (read: Brexit Mandate: 4 Sectors & Their Stocks Under Pressure)

British firms are already reeling under heavy borrowing costs, thanks to the referendum on EU’s membership. According to analysts at Standard and Poor’s, companies such as Travis Perkins (LON:TPK) and Travelodge have both raised funds with new bonds in recent months, eventually paying more than what one would expect for companies of their size and creditworthiness.

The vote has dampened the capital expenditure of many firms. In fact, the vote will now heighten volatility in the capital markets, which will lessen demand for U.K.’s assets until and unless we get a greater clarity about the exit settlement.