EXCLUSIVE TO NEWSWEEK MIDDLE EAST
By Christopher Dembik
The vast majority of economists consider that Brexit will be an economic disaster for the United Kingdom, at least in the short and medium term. It is extremely difficult – almost impossible – to predict the exact impact on economic growth and on the sterling pound. If the panic is not quickly contained by the political authorities and the Bank of England, one can expect a huge collapse in the value of UK assets.
Fall of the housing market
One of the most tragic consequences would certainly be the bursting of the housing bubble in London. Since the start of 2013, real estate prices have increased by 40% which means that homes in London now cost more than ever. According to the UBS Global Real Estate Bubble Index, London is the city where property prices are the most over-valued among the fifteen other cities that compose the index (including Hong Kong, Sydney, New York, San Francisco and Geneva). Due to the uncertainty generated by the upcoming EU referendum, many investors adopted a wait and see position that pushed prices down. In case the Leave wins, Brexit could cause a vast price adjustment in the housing market and trigger the bursting of the speculative bubble. This would have a direct negative impact on Gulf investments. However, those who fear that Arab investors will run away from the country don’t understand the way they invest. They have a profile of long-term investors and they are perfectly aware that the potential drop in UK asset values will be transitory and that a significant rebound will follow. Many investors will wait for the storm to pass. They won’t pack their bags and leave.
Moreover, Brexit could bring new investment opportunities, particularly for Middle East investors. There are at least two positive outcomes that we can expect.
Firstly, the paradoxical short-term effect of Brexit is that it might lead to an increase in foreign investments in the United Kingdom. These capital flows would be essentially constituted of speculative investments. In case of Brexit, lower UK asset values could stir the lust of many foreign investors. By buying assets at heavily discounted prices, including in the housing and financial sectors, they can expect a substantial return on investment when the panic will be over and prices will be back at their fair value. Such an investment strategy would make perfect sense in this context. It would be very smart and profitable. It is important not to forget that some of the greatest fortunes were created by intrepid investors that took advantage of business opportunities during periods of crisis.
Reallocation of capital
Secondly, there will be undoubtedly a reallocation of British investments to other parts of the world in the aftermath of Brexit. As British companies will not know which trade regulation will apply with the rest of the EU, they will either refrain from investing or they will seek to enter new markets or already promising markets. In this sense, the Gulf countries can be an interesting destination for British investment knowing that the trade and financial relations are already close and that they will inevitably intensify in the coming years, even if Brexit does not occur. There are at least three business sectors that could benefit from this reallocation of capital: the oil industry, the financial sector, which is already highly developed in the Arabian Peninsula, and finally the renewable energy sector which remains a promising field of investment for the private sector despite low oil prices.
However, the reallocation of British investments will probably not lead to the conclusion of a free trade agreement between the United Kingdom and the Middle East countries, especially the Gulf Cooperation Council. Indeed, the top priority for the United Kingdom would be to reach a new association agreement with the EU by mid-2018, which corresponds to the deadline set by the Lisbon Treaty. It is a very short period of time considering that most bilateral trade agreements take much longer to be negotiated and ratified. The British Foreign Office would be obsessed with the prospect of finding a comprehensive agreement with Brussels so it would certainly neglect the negotiation of trade agreements with other parts of the world.
Brexit will be an economic loss for the United Kingdom. There is no doubt about it. However, good things can come from bad, at least for investors who are willing to take risks.
Christopher Dembik is an Economist at Saxo Bank