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After Brexit: What happens next?

September 28, 2016

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Moderator: Doug Dannemiller, Research Leader, Investment Management, DeloitteDoug is the head of investment management research at the Deloitte Center for Financial Services in Deloitte Services LP. He is responsible for driving the Center's research platforms and delivering world-class research for his clients. Doug has more than 20 years of experience in research, strategy, and marketing in the investment management and wealth management industries.

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Panelists:Hermann Beythan, Partner, Linklaters LLP

Vincent Reinhart, Chief Economist, Standish Mellon Asset ManagementVincent is the Chief Economist at Standish Mellon Asset Management Company, the fixed income specialist for BNY Mellon Investment Management. In this capacity, he coordinates research on both developed and emerging market economies, presents the firm’s view on global economic developments, and contributes in the discussion of investment strategies. Prior to joining Standish, he was Chief US Economist and managing director at Morgan Stanley and a resident scholar at the American Enterprise Institute. Vincent worked at the Federal Reserve for twenty-four years, most recently as Director of the Division of Monetary and Secretary and Economist of the Federal Open Market Committee.

Hermann is the head of the Investment Management group of Linklaters Luxembourg where he has been a partner since 1998. Besides his decades-long UCITS practice, he is renowned for his work on cross-border financial services regulation, international private placements and outsourcing arrangements. He advises on the structuring of complex alternative investment fund set-ups and socially responsible fund structures. He is further active in several industry committees (ABBL/ALFI/CSSF) and a regular conference speaker.

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A roadmap

• The uncertain timeline of the process• The economic effects

– Both expected and realized– The market response to an adverse demand shock– A reminder about the UK’s place in the world

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Withdrawal timeline: Overview.

A vote to leave does not equal immediate departure: No immediate impact on legislation, although government will have to decide:a) when to serve

withdrawal noticeb) its withdrawal

negotiation objectives

23 June 2016

EU referendum: ‘Should the United Kingdom remain a member of the EU or leave the EU?’

UK voters decide that the UK should leave the EU

Article 50 notification: No provision on timing of serving withdrawal notice. Constitutional issues?

2016 – early 2017? 1 January 2019?

2-year negotiation period of the terms of UK withdrawal: could be extended only by unanimous agreement of all Member States.Withdrawal agreement (or agreements) signed.

Still negotiating (with approval of all Member States)

orNew arrangement in place

orNo agreement. All treaty rights and obligations lapse. WTO terms apply.

2

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Article 50: The process.

> Constitutional process unresolved: legislation probably required> Not clear if notice can be conditional e.g. on UK Parliament approval > Probably not revocable without consent of other EU Member States> Balance of power in negotiations is with EU once notice served

> What needs to be negotiated and by whom?> European Council (heads of state) will produce guidelines, probably for

Commission to negotiate> Qualified majority (20 out of 27/65%) to approve deal or unanimity? Will

depend on scope of deal

> Effective date of exit – January 2019?> What might exit look like?

Notify

Negotiate

Exit

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What might Brexit look like?Potential exit models and the trade-offs.

Full

Partial / Voluntary / Special arrangement

None

Legend: Notes: a) Trade policy is conducted at the EU level. Member States do not conclude own FTAsb) Decision-shaping, but with no vote on EU lawc) All except agriculture and fisheriesd) Except where the EU has bound tariffs at zero per cent in WTO commitments.e) Except where the EU has made commitments under General Agreement on Trade and Services.

Control and sovereignty Access to Single Market Other rights and obligations

Influence on EU Law

Own trade policy and FTAs

Customs union Tariff-free trade in goods

Free access to Single Market in Services

Free movement of people

Schengen membership

Contribution to EU budget

Standard EU member

a)

UK membershipto the EU

a) (UK Rebate)

Norway b) c)

Bilateral agreements

Switzerland

Canada

Turkey

WTOmembership

d) e)

4

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Spotlight on investment fund sector – Loss of EU Passports

• Passports impact

> UCITS> AIFMD

• Product impact

> UCITS> AIFMD

• Other impact

5

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This creates uncertainty that is harmful to economic

decision-making…

0

200

400

600

800

1000

1200

Aug-11 May-12 Feb-13 Nov-13 Aug-14 May-15 Feb-16

Source: Baker, Bloom, and Davis, http://www.policyuncertainty.com/media/BakerBloomDavis.pdf, accessed via FRED (9/22/16).

UK policy uncertaintyindex

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Before the event, the official sector offered warnings

about the economy…

• From the UK Treasury, “GDP may be 6.2% lower than it would otherwise have been by 2030, an annual cost that works out at some £4,300 ($6,000) per household.”

• From the Bank of England, “a vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential.”

• From the IMF, “The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.”

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In the event, UK data have run much better than expected…

-0.8-0.6

-0.4

-0.2

00.2

0.4

0.6

0.81

9/11/15 11/11/15 1/11/16 3/11/16 5/11/16 7/11/16 9/11/16

nega

tive |

posit

ive

Source: Bloomberg, accessed 9/20/2016.

Economic surprise indexes

USEuro areaUK

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As seen in the field…

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Increased trade frictions make the UK border less porous.

UK ExportsImports

-6-5-4-3-2-10123

1980 1985 1990 1995 2000 2005 2010 2015

Source: International Monetary Fund, World Economic Outlook (4/16)

UK current relative to GDPpercent

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Who matters to

the UK?

0 20 40 60 80Australia

AustriaBelgiumCanada

Chinese TaipeiDenmarkEuro area

FinlandFrance

GermanyGreece

Hong Kong SARIreland

ItalyJapanKorea

MexicoNetherlands

New ZealandNorwayPortugal

SingaporeSpain

SwedenSwitzerland

United KingdomUnited States

Source: Bank for International Settlements, at https://www.bis.org/statistics/eer.htm, accessed 9/7/16.

Trade weights from a narrow exchange rate index for the UK, share (%)

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Where does the UK

matter?

0 5 10 15 20 25Australia

AustriaBelgiumCanada

Chinese TaipeiDenmarkEuro area

FinlandFrance

GermanyGreece

Hong Kong SARIreland

ItalyJapanKorea

MexicoNetherlands

New ZealandNorwayPortugal

SingaporeSpain

SwedenSwitzerland

United KingdomUnited States

Source: Bank for International Settlements, at https://www.bis.org/statistics/eer.htm, accessed 9/7/16.

UK trade weights from narrow exchange rate indexes for other countries, share (%)

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London is a hub for

international banks, not just British banks

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The UK is the second-most

business-friendly

economy in the EU.

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The foreign exchange value of the pound weakened…

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16

Source: Federal Reserve via FRED, access 9/22/16.

British pound per US dollar

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As did expectations about policy around the world.

Source: Bank for International Settlements, Quarterly Review (9/16).

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A reminder about the UK’s place in the world…

22.5

33.5

44.5

55.5

2003 2005 2007 2009 2011 2013 2015

Sourced: International Monetary Fund, World Economic Outlook (4/16).

UK's share of world GDPpercent

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QUESTIONS

ANSWERS

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