Kate Clouston, Director of International Business Development at Guernsey Finance, looks at opportunities for Guernsey from the US funds sector. No surprise, the US presidential race and Brexit are the topics du jour.
The watchword is uncertainty. Systematic risk and global economic volatility have once again taken centre stage this year, calling us back to those turbulent months in 2007-2008 when it seemed the sky was falling. While there have been promising signs of recovery in the intervening years, the UK's Brexit vote and the upcoming Clinton/Trump face-off serve as a reminder that the future remains unpredictable, and we must do the best we can to protect those for whom we are responsible.
In early June, Guernsey co-sponsored an investment funds conference with the London Stock Exchange in New York. Following the conference, two road shows took place during which we shared updates from Guernsey and learned more about market conditions in the US. Universally, the first few minutes of every meeting involved our US friends apologising for the potential 'Trumpocalypse', and ourselves equally apologetic for all the furore surrounding Brexit. In every meeting the conclusion in the room was one of nervous laughter and declarations that neither world-altering event had a chance of happening.
We've been proven wrong on one count already, and we must prepare ourselves to be wrong on the other. Uncertainty of such a magnitude means investments are on hold, deals aren't completed, funds aren't listed, and everyone is waiting to see what happens next. How can one make sense of such chaos? Fortunately, it's not all bad news.
US-UK relations are very unlikely to be significantly damaged by the Brexit vote. Mutual investments, import/export relationships and human capital all strengthen this bond. There are mountains of data to support the fact that the US and Europe are each other's largest trading partners—the UK by far takes the lion's share compared to continental Europe. For example, the US and UK share the world's largest bilateral foreign direct investment partnerships.
In 2014, two-thirds of US FDI in the UK went to holding companies ($248bn) and finance and insurance ($152bn). The UK is host to 22% of US foreign assets in Europe, and affiliates in both countries employ between 1.1m and 1.2m workers in the other. It seems safe to say that both countries will be eager to resolve reasonable and mutually beneficial bilateral agreements. From the US perspective, it will certainly be easier to negotiate on a bilateral basis rather than striving to find an agreement that satisfies 27 partners.
Even so, questions remain over the UK economy's ability to recover from the shock of Brexit, with the depreciation of the British Pound cited by many as a disaster. But there are always winners and losers in any situation, and in this case the FTSE 100, for example, is likely to benefit thanks to their international focus and overseas earnings. Unfortunately for many, the answer is that is too soon to tell exactly what the longer-term effects on the economy will be.
Some managers in the US raised concerns over market access to the EU via the UK. The unwinding of the UK-EU relationship can't possibly conclude before 2019 and many will be seeking some certainty in terms of regulatory environments and market access. In a bizarre twist of events it is Guernsey, which has comfortably maintained 3rd country status with the EU for decades, who is helping advise the UK on how to proceed. Guernsey itself plays an integral role in facilitating capital flows into and out of both the UK and the EU—and this will not change. Guernsey will remain a jurisdiction of stability, likely continuing to act as conduit for an excess of £25 billion of overseas (non-European) investment into the UK from global investors, and £71 billion of investment into Europe—of which £51bn is from global investors.
The political volatility of 2016 is almost unprecedented, and that is heavily contributing to economic uncertainty. Many in the US financial world are questioning how the vote in November will affect them. While at first glance it may seem US domestic tax developments are less relevant for the UK or Guernsey, issues such as corporate tax rates and free trade agreements have far-reaching implications. Neither candidate in the forthcoming election has been particularly candid about their economic policy, although both are guilty of adopting a protectionist stance, opposing the TPP favoured by the Obama administration and promising to revisit trade agreements.
Perhaps a greater worry for those of us outside the US is the ominous silence on the issue of US debt. Whoever ends up seated in the Oval Office in January will find almost $20trn in debt on their desk. Federal debt in the US held by the public has doubled since 2007 to 75% of GDP. This debt will continue to grow, especially if interest rates are likely to rise. Indeed, Federal Reserve chairwomen Janet Yellen indicated that the case for the Fed to raise its benchmark interest rate is building. An interesting move, considering that a 1% increase, for example, would cost $200 billion a year on $20trn of debt. Indeed, if mutual investment is the real backbone of the transatlantic economy, it is in everyone's interest to encourage the financial well-being of one the world economy's main engines.
- Wright, Mark Antonio. "It's Time for a U.S. – U.K. Free-Trade Agreement". The National Review, 1 July 2016. Accessed 26 August 2016.
- Irwin, Neil. "We're in a Low-Growth World. How Did We Get Here?". International New York Times, 06 August 2016. Accessed 26 August 2016.
- Smith, Geoffrey. "Here's Another Sign the U.K. Is Weathering the Brexit Storm". Fortune, 23 August 2016. Accessed 26 August 2016
- MacArthur, Hugh, Global Private Equity Report 2016, Bain & Company, 2016.
- International Monetary Fund, Total Debt to Equity for United States, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TOTDTEUSQ163N, August 25, 2016.
- International Monetary Fund, Global Financial Stability Report: A Report by the Monetary and Capital Markets Department on market Developments and Issues. Potent Policies for a Successful Normalization. April 2016.
This article was written in September and originally published in the October edition of FTSE Global Markets.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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