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Following a referendum in June, British voters decided to leave the EU, but what does it mean for the Mena region?
Britons went to the polls in June to vote on continued membership of the EU for the first time since the mid-1970s. The campaign leading up to the vote had been dominated by concerns over immigration and the economic consequences of a leave vote. Early forecasts had suggested a victory for the remain campaign, but the result revealed support for leave had hit 52% among voters. Prime minister David Cameron - whose general election campaign during the previous year had promised an EU referendum - announced his intention to step down allowing a new leader to conduct Brexit negotiations.
The move triggered a leadership contest among the prime minister's ruling Conservative party and also saw opposition politicians in the Labour party make moves to wrest control from its eurosceptic leadership, causing further political instability.
Dubbed 'Brexit', the decision had been identified as one of the biggest potential headwinds facing global markets in 2016. The day of the result saw markets struggle, with the FTSE 100 index and sterling fall on concerns over economic and political uncertainty for a post-EU Britain. Emerging markets around the world - sensitive to geopolitical changes - were also affected, as were developed markets.
What it means for the region
As the result emerged, markets around the world started to feel the impact. The Bank of England moved quickly to reassure investors, making £150bn ($195.3bn) in reserves available for British banks. However, the loss of its final AAA-rating from Standard & Poor's increased uncertainty over the future of the UK economy.
Fitch Ratings said any immediate effects of the referendum vote on Middle East & Africa sovereign ratings had appeared limited, with short-term effects likely to come via market volatility. However a slowdown in British and European growth could weigh on Middle East & African economies. "The most immediate channel of contagion from Brexit is via an increase in investor risk aversion, with the impact depending on the degree of integration into the global financial system," it noted.
One of the other impacts was through an appreciation of the US dollar, Fitch reported, pushing up costs for servicing dollar-denominated debt and reducing competitiveness for those countries with dollar-pegged currencies. The vote was felt by markets around the world, with the banking stocks taking a particular hit. Yet, the longer-term impact on stocks is likely to focus on British and European listed companies, rather than emerging markets, according to London-based consultancy Capital Economics.
"British politics remains in turmoil following the vote for 'Brexit', but emerging market equities do not," wrote David Rees, senior markets economist. "There are likely to be more periodic sell-offs in risky assets in the months ahead, but we do not expect these to prevent emerging market stocks from performing reasonably well."
Indeed, a survey of institutional investors with $8trn in AuM carried out by global business advisory firm FTI Consulting suggested that just 4% believed Brexit would affect the Middle East region. Most respondents felt that the move would have a greater impact on the Western and Eastern Europe.
Mena opportunities
The vote has placed question marks over London's position as a global financial centre. One of the key questions surrounding an exit from the trading bloc is over its future access to European markets. London has developed into one of the key global financial centres, with many banks, other financial services firms and service providers attracted by low taxation, a highly-qualified English speaking workforce - drawn from all over the world - and English common law. Its access to 27 other EU member states has allowed it to build an unrivalled position for financial services in the bloc.
However, European rivals have already begun to make moves to usurp the British capital as a centre for clearing amid uncertainty about its post-Brexit role and access to the European markets. Fund managers have already begun to move some services to English-speaking Dublin, while Paris and Frankfurt have made early overtures to London-based international banks. With a potential outflow of financial firms, capital and experience from the UK, other financial centres in the region may also be able to take advantage of London's waning importance.
"Brexit, an event of seismic proportions has triggered extreme volatility in world markets over the weeks running up to actual vote and result days," said Gaurang Desai, CEO of Dubai Gold & Commodities Exchange (DGCX).
"It is in these times investors look for regulated exchange platforms to hedge their price risk exposures across asset classes. DGCX is now considered to be an extremely important trading venue helping investors protect their trading portfolios by effectively mitigating risk and market exposure which was evident with DGCX breaking its all-time daily volume records."
Competition among financial centres in the Gulf has already begun to accelerate in recent years and could now provide an opportunity for London-based professionals to flock to the region. The GCC has had a trade agreement with the EU since 1988, but any new agreement with the UK could take years to complete.
Investments in the UK
As one of the most developed financial markets around the world, the UK has become a centre for foreign capital. Although inward foreign direct investment (FDI) reached a recent low of $39.6bn in 2015, according to data from the UN Conference on Trade and Development, it remains an attractive investment proposition for overseas investors.
Over the years, investors from the region have been drawn to London, particularly its property sector. Real estate investors from the region and sovereign wealth funds have acquired iconic properties in the British capital. Qatar Investment Authority owns London's tallest building - the Shard - and last year Abu Dhabi Capital Management acquired the New Scotland Yard property for redevelopment.
According to property investment consultants JLL, 5% of UK direct real estate investment during the first quarter of the year came from the Middle East, down from 6% in 2015. Total investment levels were down 31% YoY at £10.7bn ($13.8bn) although investment in UK property has been dropping off more recently. However, since the referendum result was declared, several commercial property funds in the UK managed by internationally-renowned asset managers have put a halt to redemptions by investors unsettled by the ensuing market volatility and political vacuum.
"As the volatility in the capital markets due to the Brexit result ebbs and flows, the commercial property market remains as fundamentally sound as it is before the vote," wrote Nasser Alkhaled, head of Kuwaiti firm Global's real estate asset management unit.
"Once the initial correction has occurred, a depreciated GBP and falling property values could be a very attractive buy sign for overseas investors. This would also lead to a widening yield gap as real estate yields rise and bond rates fall from further monetary easing measures employed by the Bank of England."
The biggest risk to investors in was likely to come from currency volatility, said Alkhaled, adding: "We urge investors to remain cautious for the coming three months and observe the markets as political matters unfold and a new support level for the GBP is established."
© MENA Fund Manager 2016