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What’s the best Brexit outcome for investment markets?

by Alexandra Cain | 18 Mar 2019

A former local asset manager has told how he is exploiting a gap in the market created by Brexit and has set up shop in London.

Scott Schuberg spoke to FINSIA on the eve of the 29 March deadline to give a unique perspective on the controversies happening between the UK and Europe.

He said: “The relationship between the UK and Europe has changed, and it would likely require a unified, pro-European UK government to see the anxiety surrounding Brexit abate and a healthy relationship between the UK and Europe restored.”

But it hasn’t stopped Schuberg - co-founder of start-up global macro manager Resco Asset Management - from relocating to the UK from Sydney to found the business.

There are fears, he admits. What’s even more worrying than a no-deal Brexit for the UK business community is a Labour government led by Jeremy Corbyn.

“Labour has not indicated that it would try to stop Brexit,” he added.

“It would attempt to negotiate to remain a part of the single market and customs union – a very big ask from the EU.”

“Extending the deadline, if the EU would allow that, or renegotiating exit terms with the EU are both a case of kicking the can down the road, so I don’t believe risk markets would enjoy a sustained relief rally on the back of those outcomes. They would, however, get a sugar hit if the EU allows Article 50 to be extended, thereby delaying Brexit.”

In Schuberg’s view, the only positive outcome for markets would be a referendum or negotiation with a result that allowed the UK to remain altogether, or at least remain a part of the EU single market, while retaining the current conservative government.

He explained: “But the EU quite rightly needs to punish the UK to stop other members from seeing Brexit as a success story, otherwise other member countries may follow. So the only option on the table from the EU presently is to allow the UK to cancel Article 50 and remain altogether. No British political party or coalition has the power or party unity to pass law to make that happen.”

Schuberg says the jury’s out about how the market is likely to behave post 29 March.

“A hard exit isn’t priced into UK equities, UK corporate bond issues or sterling. So, if 29 March arrives without a delay or a deal, it will bring great uncertainty.”

Nevertheless, he says financial institutions have made contingency plans for Brexit. “The large sell-side institutions we deal with have already re-papered many of their clients and shifted staff to Frankfurt, Paris and Milan to ensure good governance, no matter the outcome. This is not temporary. These are people, families and auditoriums of paperwork that have been shifted – they’re not going to simply reverse it all if negotiations mean they can. London has lost a big chunk of financial services in the wake of this. If it does win business back in this sector, it will take a very long time.”

As to the effect on local businesses, Schuberg notes the UK is a convenient gateway into the EU for Australians. “This is for cultural reasons as well as familiarity with institutions like the Department of International Trade and Financial Conduct Authority, which are used to providing support for Australian ex-pats and businesses wanting to do business with the EU via the UK.” Brexit may disrupt this process.

Commenting on this move to the UK, Schuberg says he wants to create a legacy by starting Resco. “We’re not just three guys just launching a fund and splitting profits – we’re here to create a great legacy, not just for us, but for the whole industry. We’re all sick of hanging our heads at the dinner table when asked, “So what do you do for work?” Asset management can be an entirely honourable pursuit if it is structured correctly and super-profits are curtailed.

“Our long-term goal is to become a top 400 global asset manager so we can project our progressive brand of asset management on a global scale, while living up to our vision of creating a more prosperous world.”

His advice to other Aussies wanting to start up a business abroad is to pick a region that supports the business’s core competency. “We are a specialised global fixed income manager. Finding resources, experience and talent in interest rate and credit markets is easier to do in the UK than it is in Australia.”

He also notes the UK Financial Conduct Authority has an accelerator for asset managers wanting to launch in the UK. “So we found it extremely easy and quick to become licenced and get to market. In addition to this, Brexit is creating a vacuum in new launches and thus a lack of demand for associated services, and as a result we were able to secure very competitive rates from brokers, lawyers, auditors and administrators.”

Against this backdrop, perhaps Brexit may be an opportunity for other local financial services start-ups to also help fill this void. Time will tell.

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