It seems as if every day, calls for the UK to leave the EU are getting louder. Indeed, with the recent success of UKIP at the polls and an EU referendum in the works, the UK’s membership of the EU is no longer a certainty.
Unfortunately for investors, if the UK does decide to go it alone, the country’s business prospects are likely to deteriorate significantly and many companies will suffer.
A single financial market
One of the overriding benefits of the UK’s membership of the EU is the single market, and in no industry is this more beneficial than financial services.
London in particular has been able to benefit from EU membership as the City has moved quickly, utilising its strategic position to become a financial hub for Europe. The benefits from this boom have been felt throughout the country, as numerous financial services companies spring up all over the UK.
Unfortunately, it’s almost a certainty that leaving the EU would cause irreparable damage to the UK’s financial services industry. Indeed, Goldman Sachs, one of the world’s leading financiers, has stated that it will move much of its European business out of London if Britain leaves the EU. Goldman employs 6,000 of its 7,000 European staff in the UK.
Barclays (LSE: BARC) (NYSE: BCS.US) also does a significant amount of business within Europe. Up to 15% of the bank’s revenue comes from European markets and it’s not possible to put a value on the volume of business the bank does due to the UK’s position within the EU.
In addition, Tullett Prebon (LSE: TLPR), an inter-dealer broker could be forced to move. The company is has been able to profit from the UK’s membership of the EU due to standardization of financial regulation across the continent. If the UK leaves, barriers could spring up, halting cross-border trading — bad news for market makers like Tullett and larger banking peer Barclays.
A double whammy
No company is wary of the threat of independence more than Diageo (LSE: DGE). Diageo is facing a double whammy as both Scotland and Britain threaten to separate from single markets.
Diageo generates just under £3bn in annual sales from Scotch whisky which accounts for around a quarter of its total sales. However, if Scotland chooses to go it alone, it could be harder for Diageo to trade with both England and the rest of Europe. Diageo is afraid that trade restrictions and new import tariffs will dent the company’s sales.
Trade ties
Many companies have weighed in on the UK/EU debate. Big businesses like car giants Ford, Hyundai and Toyota, along with the Confederation of British Industry, have warned against Britain leaving the EU.
Kingfisher (LSE: KGF), which does around 40% of its business within the EU, although the company has not commented on the prospect of the UK leaving the Union. However, the company’s management has warned against Scotland’s separation and these comments can be related to the UK/EU situation.
With Scotland’s separation from the UK set to be decided within the next few months, Kingfisher has put on hold plans for a further 23 Screwfix shops. Management has also stated that in the future, if Scotland’s separation goes ahead, regional investment will probably be more costly and the region is likely to attract less investment.
Additionally, separation is likely to be costly as the company’s UK-wide IT system would have to change and thousands of products may have to be repriced. Of course, this is not to mention the additional trade tariffs and sales taxes which may be applied.
With these factors in mind, if the UK does leave the European Union, Kingfisher’s costs are likely to go up and sales could fall.
