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UK advisors to benefit from erratic Brexit negotiations

Our latest estimates indicate that 2016 saw total UK retail savings grow by 8.3% – the fastest pace since 2009. Yet the future of the market remains unclear, and the Prime Minister’s most recent speech shed little light on the subject.

Brexit-related uncertainty did not lead to a decline in the value of liquid savings and investments held in the UK by resident individuals. Despite record-low interest rates, we estimate that deposit balances alone grew by 6.3% in 2016 (the highest growth since 2007), as many opted for the safe haven of bank accounts to protect their portfolios from volatility. Yet those who decided to keep their money in other asset classes cannot complain. As the FTSE 100 rallied towards all-time highs, the value of savings held in funds and directly on the stock market surged, making up for any outflows.

But there is a fly in the ointment. Paradoxically, much of the growth was fueled by a significant drop in the value of the British pound (which was driven by uncertainty), as the FTSE 100 is dominated by exporters. But as global investors gradually accept and adjust to the new reality this trend is likely to reverse, or at least weaken.

This is perfectly illustrated by the capital markets’ reaction to Prime Minister Theresa May’s January 17, 2017 speech, which laid out some of the government’s Brexit negotiations plans. Although she announced that the UK is willing to pull out from the common market, investors focused on her commitment to put the Brexit deal to a vote in Parliament. As this was considered good news the British pound gained, to the detriment of the FTSE 100.

However, the speech provided no real clarity as to the shape of any Brexit deal – and this uncertainty is likely to persist until a final agreement is reached. We can expect many turning points as the negotiations progress, which means further volatility, even if it is unlikely to be on the same scale as the initial shock in June 2016. This is good news for wealth managers, as it will drive further demand for investment advice, and the positive rates of returns delivered during an unpredictable 2016 are a perfect marketing tool.

The challenge going forward is maintaining these impressive rates of growth to meet clients’ expectations. And there is another challenge – this time operational – for investment managers with foreign clients. While UK savings grew in local currency terms, the weaker pound offset this growth from a US dollar and euro perspective. Consequently, for some players the UK investment market just shrank, meaning they will have to rethink their operations in the country.

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