Hong Kong is 9,400 kilometres from London, Mumbai is 7,100 kilometres, and Tokyo is 5,900.
These Asian powerhouse cities maybe many thousands of kilometres away from Britain, but as it prepares to start divorce proceedings from the European Union, the financial decisions of millions of people and leading firms in these destinations and across Asia are being impacted.
At the recent Conservative party conference, British Prime Minister, Theresa May, confirmed that she would invoke Article 50 – the official trigger for the Brexit negotiations – no later than March next year.
It has also been widely suggested through the rhetoric during and since the conference that it would be a ‘Hard Brexit’ – meaning Britain would remove itself from the single market for goods, services, people and capital, as well as the free trade area.
And whether it is a soft or hard Brexit matters. Following Mrs May’s speeches, the pound fell to a 30-year low of $1.27, yet the UK’s blue chip index, the FTSE100, hit a 17-month high.
Since then, sterling has continued to take a Brexit-fueled battering, most notably with a ‘fat finger’ issue causing a flash crash ten days ago, briefly taking the pound to below $1.20.
All of this market activity, driven by uncertainty, is affecting Asia-based companies and individuals. Here’s how:
Brexit is a big deal for Asia-based investors as most have, traditionally, routed European investments via Britain – but Britain’s market on its own is not the only motivation that both private investors and companies are in the UK.
The government of Japan has already said in unequivocal terms that a Hard Brexit could mean the country’s companies relocating their European HQs out of the UK. To prove the point, Carlos Ghosn, the CEO of Japanese car giant, Nissan, met with Theresa May last week and hinted that investment at its plant in the North East of England could stop unless compensation is paid for any negative Brexit impact.
Similarly, private investors across Asia can be expected to ‘rebalance’ their portfolios, reducing their exposure to UK assets, and increasing exposure to international ones, due to the fact that, until the negotiations begin, there will be no clear answers to the key questions regarding Britain’s future relationship with the EU and the rest of the world, and there is to be growing uncertainty. Investors – whether corporate or individual – and uncertainty are never great friends.
Having said that, UK property is likely to be one asset class that will not be shed by Asia-based investors. This is due to the underlying strengths of UK residential property investments and the drop in the value of sterling.
Brexit and expats
There are some 35,000 British expats in Hong Kong, 50,000 in Thailand and 84,000 on the Indian subcontinent alone. And these are just the ‘official’ ones who are registered with the local authorities. It is likely that the majority of these people will be impacted by Brexit in some way.
The unexpected Leave win in June has helped to create a perfect-storm scenario for those in Asia living off a British pension. Pension deficits have increased because of falling gilt yields as a result of the decision to leave the EU. This has been exacerbated by the Bank of England’s strategy to protect the UK from a Brexit-induced recession. This strategy was, in essence, an interest rate cut and boosting its Quantitative Easing (QE) program.
The size of these deficits now puts the very survival of many company pension schemes in question. They will need to drastically modify their terms for members in order to cope, but for many they will not be able to adapt, or it might be too late, and as such, Brexit is, sadly, likely to cause the collapse of some schemes.
This will be, of course, a huge worry for anyone with a British company pension, but for those retirees living in Asia, perhaps the most immediate problem is the fact that they are also having to face the double whammy of the Brexit-pounded pound. For example, the pound has fallen 8 per cent against the Thai Bhat. The drop in the value of sterling makes the cost of living considerably more expensive in their countries of residence.
On the flip side, for British expats earning local currency in Asia and sending money back to the UK, the falling pound can be viewed as a positive. The lower the sterling falls, the more bhat, rupees or Hong Kong dollars can be sent ‘home’. Some exchange firms have recorded an eight-fold increase in remittances since the Brexit vote.
No-one knows for sure how the Brexit negotiations will pan out. And therein lies the problem. Uncertainty will grow between now and the start of the talks in March next year – and probably beyond too. As such, even though they might be continents away, international investors and expats across Asia will be watching how the situation develops carefully as it will inevitably influence their financial strategies moving forward.