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For some companies, Brexit hurts so good

August 15, 2016

Now that the initial shock of the Brexit vote has subsided, companies potentially affected by Britain’s anticipated break from the EU are beginning to play out the various scenarios for shareholders.  You can find corporate disclosure on the topic by looking at SEC, SEDAR and UK Filings made since the June 23 referendum.

If there is one word that epitomizes the tone of such disclosure, it is “uncertainty.”  While companies have a bit of a handle on the short-term impact of Brexibrexit-1477615_960_720t – most immediately and palpably, the overnight devaluation of the British Pound Sterling against the Euro and the US Dollar – things get fuzzier when it comes to the long-term horizon.  The biggest questions surround what market access will look like for UK companies doing business in Europe.  That risk, summarized in filings of various companies, is that the UK “could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers which could make our doing business in Europe more difficult.”

With uncertainty comes anxiety.  But that’s not necessarily a bad thing for all companies.  Indeed, some corporations see in Brexit a business opportunity—an opportunity rooted precisely in that feeling of anxious uncertainty.  For example, there is a general belief that the post-Brexit hangover will compel regulators to keep interest rates low, which could foster growth in the financial services sector.  “Brexit will likely benefit us,” explains commercial lender Walker & Dunlop in its recent 10-Q, “as borrowers take advantage of low mortgage interest rates and as a ‘flight to safety’ results in an increase of global capital investments in U.S. markets, including commercial real estate, resulting in higher loan origination and investment sales activity.”

Similarly, the price of gold and other precious metals surged following the vote, with investors presumably seeking a “safe haven” from the volatility of the market.  Those positioned to profit from that circumstance have been quick to pounce on the opportunity. “A continued destabilization of the Europe may occur in the wake of last night’s historic vote in the UK to leave the EU,” intoned the CEO of Lomiko Metals Inc., a British Columbia-based mining company. A grim warning, to be sure, but one with a silver lining: “There is good potential for a renewed interest in junior mining stocks seeking commodities with good demand outlooks such as gold, silver, lithium and graphite.”

Finally, Brexit may emerge as a boon for the legal services industry. That, at least, is the conclusion of Burford Capital Ltd., a UK-based litigation finance firm. Burford provides capital to businesses and law firms to allow them to pursue litigation and other legal services.  Such services are likely to be in higher demand as a result of the UK’s referendum, the company explains in a recent Interim Results report:

Substantively, Brexit will give rise to significant uncertainty for businesses, and demand for legal services tends to flourish during periods of uncertainty, boosting our business collaterally.There is likely to be more litigation as a result of Brexit, and there is no catalyst for any reduction in the volume of litigation.

Once again, it is the “uncertainty” of the situation that creates the climate for business success. As the Burford report continues, “while we regret the macroeconomic disruption and upheaval that Brexit has already caused and doubtless will continue to cause, Brexit is not bad for Burford.”  For companies engaged in certain types of business, Brexit is good precisely because it is bad.

 

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