In an interview with the Sunday Telegraph,Britain’s prime minister, Boris Johnson said he had secured “free trade with the EU without being drawn into their regulatory or legislative orbit”. The 1,255- page document published on December 26th does offer a deal, but people are still wondering about the details.

One of the overlooked areas was services. Critics say that Mr Johnson has wrongly prioritized fisheries and goods over the biggest export sector, services. The services economy make up for about 80% of the British economy, with far more services to the EU than import and conversely, import far more goods from the EU than export. Described by many as thin, the deal on services will mainly affect how businesses are conducted, but the ramifications are much wider. For example, the qualifications earned in the UK as an accountant, doctor, architect, etc will no longer be recognized in the EU. But the one hit the hardest, it is without a doubt the financial sector and more precisely, the city of London.

For four years, Brexiteers have promised that London will flourish once it left the financial regulations of the EU, but the political uncertainty made almost every major company consider relocating and open offices in different parts of the continent. After the referendum result, the city regulators got all the firms in the city to prepare for the worst and a lot of work was spent ensuring they will be able to continue trading.

What does the deal essentially mean for London and the financial sector?

The City UK lobby group argues that the financial services sector is, in fact, the biggest taxpayer in the country and their report revealed financial services made up 10% of GDP, with 2.3 million people employed across Britain. In 2019, financial services exports amounted to 60 billion – almost as much as the US and Switzerland, the next two big exporters combined. Two and a half times as many US dollars are traded in London as they are in the US, and 75% of all Euro trading goes through the city.

Some things that happened in London can no longer happen. If you traded shares in London in one of the EU27 countries, after January 1st, that had to move back to the EU. The EU brought in something called share trade obligation, and what it basically means is that people in the EU, trading in EU shares securities are legally obliged to trade them in the EU. As a result, 6 billion of EU share trading has moved away from London into other sites overnight. London’s success as the financial centre for the trading of European equities has partly been attributed to passporting, which is the right to operate around the EU27 nations. That passport is now gone.

There has already been seen the trading of some EU companies moving from London to Europe. The European Banking authority moved its headquarters from London. The European Central Bank estimated that about 1.1 trillion of assets have moved back in the EU. A report by think tank New Financial revealed that about 300 firms have set up new legal entities or moved staff in the EU.

In an interview with Stories of our times, founder and CEO of Aquis Exchange, Alastair Haynes, who in preparation for Brexit opened an office in Paris one year ago, said he was shocked at how things changed overnight: “Dramatic shift of liquidity from one place to another overnight. Up till now 75-80% of our businesses was European share trading done in London, and what happened yesterday is that that 75-80 %, 95% of it moved over to our Paris office overnight and that meant 1.4 billion Euros of business moved out of the UK into the EU. Suddenly 80% of our revenues are being derived in France. That means that that will get taxed in France and that is a tax that is lost to the UK.”

Crucial to the future of financial services sector is whether or not, the UK will be granted equivalence and for that to happen, Britain needs to convince the EU, that it will operate under the same rigorous regulations as the EU. The government is yet to decide on where it stands on the issue, but many experts agree that will probably not work in London’s best interest. In an overregulated jurisdiction, the city will struggle. London needs to find ways to be innovative, to reduce the cost of regulations while maintaining high standards that allow for a low tax environment. Major players like the US, China or Japan, are also the ones who set the rules. Where they decide to do business is essential. Also, additional terms might be negotiated in the agreement. And there is always the question of how will technology change how businesses are being done.

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Tech-City

If financial services are part of pre-Brexit London, post-Brexit London will be all about tech. East London Tech City, also known as the Silicon Roundabout (mimicking the famous Californian Valley), is an area located in the Islington and Hackney boroughs. It has gained prominence after the 2008 recession, due to many financial companies leaving the area, plummeting office rents, that ultimately attracted young technology start-ups. In the following years, both the government and the private sector, invested massively in the area, now packed with tech companies and university campuses.

From the Silicon Valley to the Silicon Roundabout

As if Covid-19 didn’t happen, London managed to attract almost £8 billion ($10.5 billion) in venture capital. Furthermore, the city has acquired more tech investment than other major EU capitals..combined. Almost half of the fundings came from non-Europeans investors, 36% of which were Northern Americans. Covid-19 apparently acted as an accelerator for this type of industry and more money is expected to flow to London. Tech workers are moving to the British capital by the thousands, as confirmed by a 10% increase in the number of tech employees looking for homes to rent in the capital between 2018-2019.

The new Silicon Valley?

The pandemic has speeded up the digital transformation of health and education sector so much, that the point of no return is long gone. London’s ever-growing tech sector can facilitate this process even more. Given that Silicon Valley is almost exclusively accessible to Big Tech names, London could become the new incubation centre for the tech giants of the future. The city has to attract fun and innovative and create the right infrastructure for them, however, competition from other cities is fierce.

Closing the gap

Whilst being too early to predict whether London will become the new Silicon Valley, it is certainly closing the gap with it. London has always been more conservative when it comes to entrepreneurship. However, to succeed in tech, companies have to be allowed to fail as many times as necessary before they win. After the financial crisis, Britain has rediscovered its entrepreneurial creativity, especially in terms of financial services. As mentioned above, Britain’s tech industry is undergoing a process of diversification, as more and more startups are operating in the food, healthcare, and education services.

UK Tech golden decade

IPO activity is set to bounce back this year. The UK currently has almost 140 potential unicorns and 80 unicorns, more than any other European country. Furthermore, the Treasury will release a review of listing rules to encourage UK tech companies to become public. Darktrace and Deliveroo are among those companies who are reportedly considering an IPO. This might be in fact the start of a golden UK Tech decade. With 47 universities, the advantages of doing business in English, and an unlimited pool of highly qualified workers, London is the place to be.

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Your commercial awareness dose!

The spread of COVID-19 has wreaked havoc all over the world. Economic instability is present everywhere. According to the IMF’s World Economic Outlook, the world economy will shrink by 8% in 2020. The reason being that following the spread of Coronavirus, strict restrictions were imposed on peoples’ movement, and lockdown prevailed all around the world. This led to global uncertainty, leading to a rise in inflation and unemployment level as most of the companies laid off employees expecting a deceleration in growth rates, a downtrodden international trade and fall in investment level.

Same is the case with Asian countries where movement control was imposed in February-March 2020 in order to curb the excesses of the pandemic virus that proved to be a deadly one. Strict lockdowns prevailed that caused people to speculate tough times ahead. As the origin of COVID-19 took place in Wuhan, China, the impact was greatly felt in the neighbouring Asian region. With China’s recent drive of regional connectivity through its OBOR (one belt one road) initiative, the Asian countries are in close socio-economic and political relations with China. Hence, stringent measures were taken in Asian countries to follow China’s suit in the imposition of lockdown.

This led to slow down in the economy of Asia. According to the IMF’s World Economic Outlook, the Asian economy will shrink by 1.6% for the first time in recent decades. The region’s economy is dependent on global supply chains and trade activities. Therefore, Asia is not expected to grow if the world economic environment is bleak. During the lockdown, the economic activity in the region fell by 12% per month according to rough estimates. With the recent ease in lockdown, the economic activity is expected to recover at 7% per month.

The reason for the slowness in recovery is due to the SOPs (Standard operating procedures) imposed by governments of Asian countries that ensure minimal inter-personal contact amongst people. Such measures have led to a downtrodden performance of the tourism sector and foreign remittances on which Asian economies overly rely.

The Asian financial market, in tandem with the global market, is expected to recover in the last quarter of 2020 conditioned upon the containment of the spread of COVID-19 pandemic. The virus has been thwarted to an extent, and the stock market has started to recover in almost all Asian countries. But there is apprehension that if the second wave hits the world, the bottom will fell out of the market again. So, we should expect growth in the Asian stock market in spurts until the vaccine is made available.

The supportive low-interest rates, accommodative expansionary monetary policy and contractionary fiscal policy along with lower inflation outlook and growth in demand for goods and services related to health, rubber gloves, medical equipment and sanitizing products are the factors that provide robust opportunities for the Asian market to recover in post-COVID-19 period. The only factor that is considered a nail in the coffin of financial markets is the resurgence in the pandemic.

Hence, at the moment, the policymakers should focus on restructuring health-related policies to hinder the spread of the virus. Also, the government should take measure to balk upon the overheating of the stock market. The risks associated with the Asian market is political instability, fall in global markets and slower than expected economic recovery. If the Asian countries’ government can prepare itself to fight such circumstances, then they will grow in a sustainable manner.

It is an understood phenomenon that after every trough in business cycles of growth, boom follows. All we ought to do is to prepare the right policies and follow the guidelines. Keeping in view the recent trends in the Asian economy, we can deduce that the economy will recover in the near future. The Asian countries’ government need to support the economic environment with their vigilant policy-making framework.

They must ensure that the interest rate remains low, there is macroeconomic stability prevailing, the monetary and fiscal policy are accommodative, that credit availability is smooth, inflation remains low, and political environment is stable. By taking these steps, we can say that the region’s economy will recover and perform well in the future. But the growth will be in spurts because of the defensive nature and risk averseness of investors. People are apprehensive about the re-emergence of the COVID-19 pandemic.

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