Brexit!

Brexit!

In 1932, British author Aldous Huxley published the novel ‘Brave New World’. On 23 June 2016, 51.9% (Figure 1) of the British people decided to write their own version of a ‘Brave New World’ with a vote to LEAVE the EU. For many people around the world, the result has come as a shock given that the betting markets and financial markets had predicted a win for Remain camp.

While many within London had largely correctly called that London itself would back the staying within the EU, almost everyone had written off the pugnacious working classes of England. This historic vote in 2016 was already predicated by working class football teams like Leicester City winning the Premier League and with a 72% turnout, the noise of the working class became a roar of defiance in the EU referendum (Figure 2).

Many of us met at the Bloomberg event earlier this month with most taking the London view that Brexit was unlikely to happen. However, we are all now left to reflect on what this landmark vote potentially means for UK investment into Italy. Our initial view on the situation from both Italian and British perspective is that this is very much likely to slow the influx of funds into Italian investments over the coming months. Given the initial market volatility already directing hitting the British Pound (Figure 3) and a new British Prime Minister to be appointed in October this year, both the financial market and political uncertainties will only bear unfavourably for the UK outbound investment market for the coming months.

We think that the turning point for when this negative sentiment is likely to change should start from October 2016 with appointment of a new Prime Minister and when Article 50 of the Lisbon Treaty is invoked. Once the Article 50 process starts, the 2 year process of negotiating the terms of the UK’s withdrawal and the renegotiation the last 40 years of common market agreements has to take place. How successful this becomes will no doubt be watched closely by all parties, both for and against the EU project, since the ramifications for Britain’s success around extracting itself from the 28 member club are significant.

Despite the headlined chaos, Italian investment opportunities, particularly within the small to medium (SME) sectors (Figure 4), should still generate significant investment interest from UK companies, in particular those already with significant Euro holdings. Given that most of the UK’s investors were firmly in the EU remain brigade, their medium to long term outlook on Italy’s investment attractiveness is unlikely to be swayed by these single market events. As such, it is not a matter of if UK funding will come for the right opportunities, it’s just a matter of when the FX and political situation stabilises itself.

Given the broader implications of the Brexit vote, it will be interesting to see what the chances are of other EU countries leaving in near term. For example, could Italy see itself leaving the EU? Today’s UK result should clearly be a lesson in not under-pricing the risk of this arising on both the FX and political side. Accordingly, money put into Italian businesses going forward will have to show that the returns generated cover increased FX hedging costs which can quickly add up over the course of medium to long term investments. Furthermore, where the risk is found to be growing, considering the cost of political risk insurance should also be factored into assessing the cost benefits of investment. All of this of course is where Oraculum and in particular with the peculiar initiative of the “Enterprises Factory” looks to bring its just some of its expertise advising Italian SME’s on how best to attract foreign investment capital in the midst of uncertainty, while also helping their businesses best position themselves to make them investable at the highest standards.

Overall, UK investors who are still looking at Italy as a destination to invest in will probably continue to do so given that the core fundamentals of Italian businesses have not really changed with the Brexit vote. The only question that remains is when UK based-investors can implement the deployment of capital after the volatility calms down.

Ultimately, this is an opportunity to reinforce the much needed protection to the local economies and to the environment in which SMEs operate in Italy and elsewhere in Europe, which can be considered the highest wealth of this continent and his remarkable people.