In The Headlines
Businesses have contended with a high level of uncertainty since the U.K. voted to withdraw from the European Union in 2016. With the U.K. parliament still deadlocked over Brexit, the October 31 deadline for the U.K. to leave the EU has been extended to January 31, 2020. In an effort to break the deadlock, U.K. lawmakers voted this week for a general election on December 12, 2019. The ruling Conservative Party hopes to return with a majority, passing its renegotiated Brexit deal and permitting the U.K. to exit the EU by the extended deadline.
The uncertainty will be far from over when the U.K. leaves the EU. Negotiations will shape the way business is done between the two economies, which make up the largest trading bloc in the world, for decades to come and they must be completed in a little over a year.
Why It Matters
Since the U.K. referendum in June 2016, Brexit has been an exercise in navigating uncertainty: how do businesses maintain and grow profit and plan for the future when outcomes, objectives and even timelines are unclear?
With Brexit, perhaps the biggest challenge is the lack of precedent, says Tapan Datta, head of asset allocation at Aon. There’s simply no example of a major market like the U.K. pulling out of an economic arrangement like the EU. “So you’re stepping into the dark to a tremendous extent,” he says.
During periods of market uncertainty, investors often look to increasingly diversify asset allocations, says Datta. “You’ll see a rise in investment in government bonds and credit,” says Datta. “Other beneficiaries of low interest rates are real estate, absolute return funds (like macro hedge funds) and – for very conservative investors – gold.”
The uncertainty and volatility in the financial markets are also felt in the broader economy. “The U.K. has already been suffering from Brexit impacts without Brexit actually happening,” says Graham Bristow, managing director at Aon Credit Solutions.
How Companies Are Responding
“When you ask many companies about their Brexit preparations, what you hear is uncertainty – it’s difficult or near impossible to prepare for the unknown,” says Bristow.
Ongoing global trade uncertainty, caused by Brexit and China–U.S. trade tensions, has meant growing supply chain risk: what happens if your largest customers cannot pay? To combat this risk, says Bristow, companies have been embracing credit insurance.
“You can be prepared in certain areas, but fundamentally there are many variables that you can’t control,” Bristow says. “This can make operations very difficult and is likely why many people are looking at risk-transfer options like credit insurance to address possible insolvency issues.”
For many U.S. businesses using the U.K. as a platform for business in the EU, Brexit prompts relocation considerations, according to Clayton Sasse, managing director at Aon Credit Solutions. “Aside from trying to determine what sort of macroeconomic path the world is on, a concern for multinationals is how to best have a platform in the EU,” he says.
Global supply chains have also been impacted by commodity and currency rate volatility.
“There’s been a massive change in currency valuation, for example, which has an impact on both imports and exports,” Bristow adds.
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Currency hedging will likely be a valuable tool for companies addressing the impact of currency fluctuations post-Brexit, he says.
Finding A Path Forward
Trade conflicts and geopolitical issues have further complicated Brexit for some organizations.
“Companies looking at how they trade into the U.K. and around the world are finding that Brexit isn’t an isolated area of concern,” says Stuart Lawson, CEO at Aon Credit Solutions across Europe, the Middle East and Africa. “There are multiple risks, whether it be trade tensions between the U.S. and China that spill into other regions or escalating economic and political tensions in markets such as Turkey and Argentina. This can be seen as a domino effect in which Brexit is a key factor.”
One thing remains certain as businesses in the U.K., EU and elsewhere look to navigate the post-Brexit landscape: uncertainty.
“Brexit is a great example of not just navigating through the unknown, but also a reminder of the importance of diversification – of markets and suppliers,” says Datta. “For those who are able to take this time to create a future view of their customers and where they’re going, this type of event can be a silver lining in the chaos.”
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