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Abu Dhabi, UAESaturday 20 October 2018

Brexit: reactions from Switzerland and Europe

Latest reaction to the UK referendum on the European Union.

GENEVA // In Switzerland, the reaction to the UK’s decision to leave the European Union veered between concern and confusion. Below is a timeline of reactions as the shock result became known.

Themselves no great lovers of the European project, the landlocked Swiss, heavily dependent on trade with EU member states, nonetheless see Brussels as a general source of stability in a turbulent and often chaotic world.

On Friday morning, the reaction was a mix of bafflement as to why a rich but small island would seek to divorce itself from a grouping of 28 (soon to be 27) member states that still collectively exerts genuine global clout, allied to fears that British exceptionalism would further stymie Switzerland’s already faltering economy.

The head-scratching and finger-nail biting was visible in the Swiss media. The Tages Anzeiger described the historic events as a “shock to the Swiss economy”, while the respected Zurich-based Neue Zürcher Zeitung called the UK’s population’s decision to leave a “difficult day for Switzerland”. In late morning trading, the Swiss Market Index, comprising the country’s 20 largest and most liquid listed equities, was trading down a little under 3 per cent on the day.

After seeing the Swiss franc rise 6.6 per cent in value against sterling, and 1.4 per cent against the euro – its highest level against the single currency since August 2015 – the Swiss National Bank said it had “intervened in the foreign exchange market to stabilise the situation”, adding that it would continue to remain “active” in the market until it had shaken out the excess volatility. The move by the SNB, which unpegged the franc from the euro early last year in the run-up to the launch of European-style QE, had been well flagged.

Switzerland’s president Johann Schneider-Ammann said in the capital, Bern, that the UK plebiscite raised “many questions” for Great Britain, Switzerland, the EU and Europe as a whole. “The European concept,” he warned, “must be reconsidered”, a veiled reference to ongoing discussions in Brussels as to whether EU members would benefit or not from ever-closer political, fiscal, monetary and economic union.

Attention in Bern will now turn from Britain to its own ongoing discussions with Brussels over a raft of issues, not least the issue of immigration. In a referendum of its own in 2014, Swiss voters elected to stem the number of inbound migrants from member states, a decision that strained bilateral relations with the EU, given the free movement principles that underpin the passport-free Schengen zone, of which Switzerland is a member.

Mr Schneider-Ammann said he would seek, along with the Federal Council, the doemstic head of government and state, “with all his might” to bring the EU to the negotiating table, in the hope of striking a deal on immigration acceptable to both sides. But he added that the “differences in crucial issues” between Brussels and Bern were “still large”, and noted that Britain’s decision to opt out of the EU merely “reinforced the [widespread] uncertainty about the economic development of Europe”.

In Switzerland’s big financial centres the view was largely one of shock and surprise. The private banking group Julius Baer issued a research note that warned of “mayhem after the UK leaps into the unknown”. It highlighted a series of key questions going forward, and wondered whether this meant “the end of the European Union”. Should bond spreads of peripheral European sovereigns rise early next week, it was, the bank said, a sure sign that the single European market was “preparing for break-up”. It warned investors to “stay calm, stick to quality, and look for bargains in assets you always wanted to own but that always looked pricey”.

On a lighter side, Marie Owens Thomsen, the chief economist at Indosuez Wealth Management, said that while it was a dark day for the UK, Brexit offered a “great buying opportunity” for everyone else. “Brexit won’t invoke a global recession but it will invoke a UK recession,” she said. “I would sell everything related to UK and buy everything else when the market dips. [Brexit] raises the risk of Britain returning to the dark days of the 1970s, when its finances were constantly in crisis and it was running to the IMF for help.”

Ms Thomsen said the UK vote also handed investors a solid reason to invest in Switzerlands, by buying stocks in the country’s army of globally-respected manufacturers. “The biggest beneficiaries will be Swiss pharmaceutical firms, who are both intense importers and price setters in export market. My focus would be on buying Swiss exporters with world-leading positions in their market,” she said.

By deciding to leave the European Union, a majority of British voters have also potentially undermined the fragile recovery that has finally taken hold across the majority of the euro zone. And it threatens to undermine Switzerland’s previously robust economy, which grew by just 0.1 per cent year-on-year in the first three months of 2016. The Swiss watch industry, a sector that has long acted as a barometer of the wider economy, saw exports fall by 10 per cent year-on-year in May, as watchmakers struggle with a prolonged slowdown in Asia and across the emerging world. Thursday’s vote by Britain to add to the uncertainty will certainly not help sales.

Timeline of reactions:

All times UAE

12.30pm

Mark Haefele, the global chief investment officer at UBS Wealth Management: “While the UK vote may give encouragement to anti-EU groups in other nations, our European economists do not expect any further referenda of EU membership in the short term, given a lack of necessary majorities.

“In the near term, investors should pay close attention to domestic political developments in the UK, including any formal announcement of a wish to leave the EU.

“UK companies and sectors most closely leveraged to the domestic economy (such as financials, consumer discretionary, and the FTSE 250 mid-cap index) should continue their pre-referendum underperformance, versus defensive names and international firms that benefit from a weaker pound. Increased uncertainty may lead to declines in euro-zone equities, too, with financials likely to be hardest hit if they have significant UK exposure or large operations in London.”

11.40am

Marie Owens Thomsen, the chief economist Indosuez Wealth Management: “It’s bad for UK but a great buying opportunity for the rest of us. Brexit won’t invoke a global recession but it will invoke a UK recession. I would sell everything related to UK and buy everything else when the market dips.

“For Switzerland, the greatest near-term impact is pressure on the Swiss franc. For sure, the Swiss National Bank will take the necessary steps to cap the level and rate of appreciation. But in the meantime, it’s great for Switzerland’s import-intensive economy, and even for globally respected domestic manufacturers. The biggest beneficiaries will be Swiss pharmaceutical firms, who are both intense importers and price setters in export market. My focus would be on buying Swiss exporters with world-leading positions in their market.

“The fall in the value of the pound sterling will not be good news for the UK. The country isn’t particularly export-intensive. Imports will surge as the price of imports falls, widening the current account deficit and raising the risk of a balance of payments crisis. In other words, it raises the risk of Britain returning to the dark days of the 1970s, when its finances were constantly in crisis and it was running to the IMF for help.

10am

Berenberg Bank: “The sovereign has spoken. The UK has voted with a majority of roughly 52 per cent to 48 per cent to leave the European Union. The UK and Europe enter a new age of elevated risks.

“Future historians may cite today’s vote as the beginning of the end of the UK as we know it. The risk has risen that the country may ultimately lose Scotland and Northern Ireland.

““The UK had outperformed all other major economies in the western world in terms of per capita GDP growth since joining the European Economic Community in 1972. It will now likely end up poorer, more isolated and somewhat at the mercy of a big neighbour over whose affairs it has now forsaken all influence.

“On the European continent, we have to brace ourselves for serious ripple effects. The UK vote to leave pushes the EU into a serious identity crisis. This will embolden all those who call for copycat referenda on EU or euro membership. Our best guess remains that no other country will follow suit and leave the EU in the near future. However, the risks now loom much larger than before. Following the result, we expect the UK to file for divorce from the EU shortly.

“Of course, the City of London will remain a great international centre for financial and other services. But it looks likely to lose some part of its business as it turns from an ‘onshore’ to an ‘offshore’ financial centre for Europe. The Brexit decision comes as somewhat of a shock to markets, which had largely priced out the risk earlier this week. However, it is not a black swan. The world as we know it does not end with a Brexit. It just became a more risky place last night.”

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