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Brexit

The Brexit effect on banking, funds and commodities

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Today marks the one year anniversary since the UK's decision to leave the EU. How has the historic vote affected markets?

Analysts from Thomson Reuters dive into the data to explore Brexit’s impact on investment banking, UK fund industries and commodities markets.

Investment banking: Share of fees lowest since records began

Research from the Deals Intelligence team at Thomson Reuters found a number of interesting trends from the last 12 months:

UK IB fees account for all-time lowest share of global IB fee pool

Fees generated in the UK account for 5.2% of the total global fee pool so far this year, the lowest annual share since our records began in 2000. 30.9% of 2017 IB fees generated in the UK were earned by UK banks, up from 28.2% in 2016 and the highest annual share since 2005.

Global IB fees increase 16% YTD

Global investment banking fees total US$45.4 billion so far during 2017, up 15% compared to the same period in 2016.

While UK equity capital markets underwriting fees have increased 59% year-on-year, and DCM and syndicated lending fees have seen double digit increases, advisory fees from completed M&A transactions have declined 34% to the lowest year-to-date level since 2010.

Fees earned by UK banks increase 17% YTD

UK Banks have earned 17% more investment banking fees globally so far this year compared to this time last year, a combined total of US$3.7 billion so far during 2017 compared to US$3.2 billion in 2016.

UK banks take an 8% share of this year’s global IB fee pool

UK banks have earned a combined 8.2% of the total global IB fee pool so far this year, up from 8.1% in 2016 which was the lowest share since our records began in 2000.

Fees in Asia increase 41% YTD

UK banks have seen a 41% increase in fees in Asia year-to-date, a 16% increase in the Americas, a 16% rise in domestic UK fees, and 11% more in EMEA excluding UK.

UK fund sectors: Uptick in volatility

The below chart from Thomson Reuters Lipper shows how the short-term volatility of popular UK fund sectors has reacted to recent global events. Jake Moeller, Head of Lipper UK & Ireland Research also provides some thoughts on what this shows.

Volatility of UK Fund Sectors - Brexit

“The UK election has resulted in a slight uptick in fund volatility in equities sectors. However, in context of recent events, the actual Brexit vote and then the U.S. elections appear to have been much more significant. Even the more volatile UK small and midcap sector (grey line) has only seen a comparatively modest pickup in volatility since the UK election, compared to the Brexit vote.

The general trend in volatility since the Brexit vote has been down, suggesting that investors will place considerable weight to the outcomes of the EU departure rather than geopolitical events themselves.

Precious metals plunge

Ross Strachan, precious metals demand manager from the GFMS team at Thomson Reuters, takes a look at what has happened in the precious metals market since the vote.

“On June 23rd last year the UK voted to leave the European Union. As this became apparent after the polls closed it led to a sharp plunge in the value of sterling, from which it has not recovered in the subsequent twelve months. Indeed, the gold price gained 25% in sterling terms in the fortnight after the vote but the impact was short lived. In dollar terms the rally amounted to 8% over the same period. Thereafter, we would argue that the vote has had no tangible effect on gold prices, at least on a sustained basis.

Precious Metals / Commodities - 1 year after Brexit.

As we have previously highlighted, the impact centred on the consequences of the drop in the GBP/USD exchange rate and the boost to gold prices. This led to a temporary doubling in scrap flows to multi-year highs and, albeit with a delay, a marked drop in jewellery demand and strong investment flows.

While there was talk of political instability playing a role, we were firmly of the view that this was a minor factor in the direct impact on the UK precious metals markets a year ago. Instead it was the price that was the driver for the response from these sectors.

In this light it is unsurprising that the UK precious metals industry has seen subdued activity since the recent general election and gold prices in sterling terms have been relatively stable. It is true that there was some initial selling on the morning after the election but this appeared to die down very quickly, and frankly we would describe the current quarter as the least dramatic for UK precious metals markets for some considerable time.

Given the political uncertainty since the general election, one point to note is that attempts to standardise EU legislation around Value Added Tax (VAT) on gold led to the eradication of VAT on gold sales in the UK. This was supported by the Value Added Tax Act 1994, which came into force on January 1, 2000. It is currently far from clear how Brexit will pan out but if the legislation is not replaced in UK law then this is likely to cause a substantial dent in gold investment demand in the UK.”

Oil industry: Waiting for Brexit clarity

Saida Litosh, oil analyst at Thomson Reuters takes a look at what impact the vote has had on the oil industry in the last year: 

“Following the EU referendum in the UK, Thomson Reuters research demonstrated the importance of the UK-EU trade relationship for the UK oil industry, particularly when it comes to trade of oil products. For instance, the EU still remains the major source of gasoline products in the UK, accounting for roughly 85% of the total.

Furthermore, the EU remains the top supplier of gasoil/diesel into the UK, with a share of roughly 50% of total imports. This relationship still remains crucial for both sides and we are unlikely to see any material changes until there is more clarity about the full extent Brexit would have on the UK economy and trade relationships with the EU and the rest of the world. The importance of Scotland in UK’s upstream is still evident as oil fields in Scottish territorial waters have historically accounted for more than 80% of total UK production.”

Market impacts of the Brext vote one year laterDownload the full infographic for this post [PDF]

Carbon market: Prices drop, then rally

Anders Nordeng, senior analyst, Carbon Team at Thomson Reuters takes a look at what impact the carbon market has seen since the vote. 

“In terms of carbon prices, there was a marked drop immediately after the Brexit vote, down 12.1 percent and continued to fall over five consecutive days closing at €4.47/t on 30 June, 21.3 percent lower than before the Brexit vote. Note that carbon was hit more than other commodities, something that probably reflects the extent to which the carbon market is strongly influenced by policy/regulatory changes.

Prices have moved a lot since then, rallying last autumn, dropping in November, picking up in December, etc. Generally speaking, the intra-day variations have been less pronounced over the last few months, compared to last year. The reasons for the movements since July 2016 are not obvious, but we believe they are mainly linked to fluctuations in energy commodities relevant for carbon, namely coal and German power.

Looking forward in the short term (between now and 2021) we expect the market to be bearish. Reduced hedging by utilities and more sell-offs by industry will weaken demand/increase supply, aggravating the accumulated surplus. In the long term (post 2021) we expect things to be more bullish. The UK has been a net contributor to building up the surplus (has reduced emissions, hence demand for EUAs) more than most other ETS countries. Taking out UK issuance and UK demand will in the long run lead to a slightly more balanced market.”


Cut through the uncertainty

As Brexit unfolds, ensure you stay focused with trusted news and information from Thomson Reuters, including:

Article 50 has been triggered. Find trusted answers on our Brexit hub at article50impact.com

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