The starting pistol for the Brexit negotiations and the triggering of Article 50 (no later than March 2017) was fired at the recent Conservative party conference by British Prime Minister, Theresa May. Judging by the rhetoric during and post conference, it is looking increasingly likely that the UK government will opt for a so-called ‘hard’ Brexit. That is to say that Britain would make a clean break from the single market for goods, services, people and capital, as well as the free trade area.
The PM, it can be easily and reasonably argued, is being backed into a corner to implement this hard Brexit to satisfy a large number of the Conservative Party members and in order to avoid her premiership being called into question. The influential Eurosceptic element of the party would view a ‘soft’ Brexit – maintaining access to the single market, with a looser arrangement with the EU – as nothing but betrayal and would holler loudly about Mrs May not ‘listening to the British people’, who voted Leave in the referendum. Markets have reacted badly to the likelihood of a hard Brexit, fearing disruption to the economy that may include and new tariffs and non-tariff barriers being placed on Britain’s trade with the EU.
Following Theresa May’s comments at the Conservative Party conference, sterling fell to a 30-year low of $1.27. Perhaps paradoxically, the UK’s blue chip index, the FTSE100, hit a 17-month high but this can be explained as a currency translation effect – that’s to say the increased value, in pounds, of the overseas earnings of Britain’s largest companies being reflected by higher share prices denominated in pounds.
Since then, the pound has continued to take a Brexit-driven pounding, with a ‘fat finger’ incident briefly taking the currency to below $1.20 last Thursday night. This, of course, directly affects people’s wealth; not only in Britain, but around the world, including here in the UAE too.
International investors, such as those in the UAE, will now be far more likely to reduce their exposure to UK assets as a precautionary measure and increase their exposure to global stocks, bonds and perhaps property too in such hotspots as Dubai.
One asset class that is likely to remain largely unaffected is UK property. This remains highly in demand by GCC-based investors due to the ongoing fundamental strengths of British residential property investments and because of the fall in the value of the pound. The Brexit fall-out is also affecting all those – and there are many of them here in the UAE – who have UK pensions. Indeed, it has helped to create a perfect storm for British pensions. Pension deficits have grown due to falling gilt yields following the Leave victory, compounded by the subsequent interest rate cut and Quantitative Easing boost by the Bank of England to cushion the Brexit blow.
The scale of these deficits casts doubt on the survival of a large number of company pension schemes. In order to survive, they will need to make drastic changes to the terms of employees’ pension schemes.
As such, the Brexit impact is forecast to lead to the collapse of some firms and their pension schemes.
It is the BoE’s policy of ultra-low interest rates and QE that is perhaps particularly concerning for British expat retirees in the UAE.
As well as being faced with the same challenges of UK-based pensioners and savers, they also have to deal with the falling pound. This drop makes the cost of living much more expensive in their adopted country.
However, for UK expats earning dirhams and sending money ‘back home’, the outlook is quite different. A weaker pound helps to repatriate a higher amount straight away. Naturally, although a cheaper currency will lead to inflation, the negative effects of inflation will take time to come into play, whilst the currency exchange gain occurs instantaneously.
Action: Expatriates residing in the UAE should perhaps now, more than ever, consult a specialist financial adviser. We all need to mitigate the effects of a hard Brexit, and the adverse impact it could have on our long term savings and financial strategy. There are a host of steps, including transferring a British pension into an HMRC-recognised Qualifying Overseas Pension Scheme, that can be taken to sidestep risk and make the most of opportunity.