EDUCATING

SUPPORTING

REPRESENTING

www.charteredaccountants.ie

Opportunities and Threats:

What Brexit Means For Ireland

Philip O’Sullivan

Chief Economist,

Investec Ireland

The fundamental issue

• “The trouble with our times is that the future is not

what it used to be”

– Paul Valery

All changed, changed utterly

Confounding betting odds and currency markets, the UK voted 51.9% to 48.1% to leave

the European Union on 23 June 2016. The margin of victory was 1.3m votes out of the

33.6m cast.

The vote was fragmented by geography, with large Remain majorities in Scotland (62%),

London (60%) and Northern Ireland (56%) and Leave majorities in every other region.

A Disunited Kingdom? The Scottish administration is drafting legislation for a second

independence vote – with three post-Brexit polls giving leads of between 3% and 7% to

the independence camp. For context, in the 2014 Scottish independence referendum the

pro-Union side won 55%-45%.

Pre-positioning created asymmetric risks…

300305310315320325330335340345350

14,500

15,000

15,500

16,000

16,500

17,000

17,500

Jun-0

1

Jun-0

3

Jun-0

5

Jun-0

7

Jun-0

9

Jun-1

1

Jun-1

3

Jun-1

5

Jun-1

7

Jun-1

9

Jun-2

1

Jun-2

3

Jun-2

5

Jun-2

7

Jun-2

9

Jul-01

Jul-03

Jul-05

Jul-07

Stock Markets

FTSE 250 EuroStoxx 600 (RHS)

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.76

0.78

0.80

0.82

0.84

0.86

0.88

Jun-0

1

Jun-0

3

Jun-0

5

Jun-0

7

Jun-0

9

Jun-1

1

Jun-1

3

Jun-1

5

Jun-1

7

Jun-1

9

Jun-2

1

Jun-2

3

Jun-2

5

Jun-2

7

Jun-2

9

Jul-01

Jul-03

Jul-05

Jul-07

Exchange Rates

EURGBP USDGBP (RHS)

…still though, the moves have been severe

Sterling at a 31 year low against the dollar and a 3 year low against the euro

UK 10 year gilts fall to a record low of 72bps

The FTSE 250 fell by as much as 14%

Leading open ended UK commercial property funds have frozen redemptions

Dislocation impacting asset values elsewhere

Ireland’s 10 year yield fell to as low as 41bps, ISEQ -17% in Brexit’s wake

The Swiss 50 year bond yield is negative

“Who Governs Britain?”

Timing is everything

It’s up to the UK to invoke Article 50 of the Lisbon Treaty

Negotiating period / remaining EU membership set at two years, this can be extendedindefinitely by unanimous EU28 vote. Note that the EU-Switzerland bilateral trade dealtook six years!

UK looks set to remain a member of the single market for a long time to come (whoknows – perhaps permanently?)

It’s not just the EU that the UK has to negotiate with – WTO membership needs to berenegotiated, plus existing trade deals with 53 other third party areas would also ceaseon a EU divorce

What model might the UK adopt?

Switzerland

Tariff free goods access, but limited single market access for financial services (NB The

City!). Free movement of labour. No vote on EU legislation, but will accept most.

Norway

Access to single market for most goods and services (ex fisheries and agriculture). Free

movement of labour. EU Budget contributions. No vote on EU legislation, but will accept

most.

WTO

4% average EU import tariffs, may mirror EU regulations to ‘passport’

Bringing it all home

What it means for Ireland

Black Wednesday 2.0? Praise be to diversification!

0.7

0.8

0.9

1.0

1.1

1.2

1.3

GBP per IEP

Exchange Rate Long-Term Average

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

The UK's share of Irish goods exports

Some sectors are vulnerable

0%

10%

20%

30%

40%

50%

60%

GB share of merchandise exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

GB share of services exports

Short-term consequences for Ireland

Exports to UK (a sixth of the total) face the headwind of a weak pound

Competition from UK imports will be unhelpful for many domestic firms, but it will also

result in some cheaper input costs for some firms

Business and consumer confidence will be knocked, hitting investment and retail sales

But Ireland could also grow its share of FDI to (part-?)compensate for this

Growth to moderate – every 1pc drop in UK GDP moves Irish GDP by 0.2pc. Irish

growth should still beat most advanced economies, however

Government likely to temper fiscal plans

Long-term consequences for Ireland

Estimates from leading research houses (IFO Institute, Oxford Economics, LSE/CEP)

suggest that Brexit could permanently reduce Irish GDP by between 0.8% and 2.7%

relative to baseline

However, the reality is that we don’t know what the ultimate impact will be as much

hinges on the nature of trading arrangements struck between the UK and EU

Irish exporters likely to have to deal with a structurally lower sterling as UK’s ‘safe

haven’ status has gone the way of its AAA rating. Major changes to supply chains will

likely be needed

Ireland could win big from relocation of operations out of the UK e.g. financial services.

Openness to skilled migrants could also help boost investment. But can our property

markets handle this?

FXFx heFxdg

t Means For Ireland

Kieran Ferguson,

Treasury Specialist,

Investec Ireland

€€/££ reaction to Brexit

Corporate Treasurer with no sterling exposure Euro at risk from Brexit?

Image source: www.dreamstime.com Image source: www.businessnewsdaily.com

FX Market Trends – EUR/GBP 2016 YTD

FX Market Trends – EUR/GBP 10 year trend

FX Market Trends – EUR/GBP

High to

Average

Index Jan-01

EUR/GBP High Low Low % Average 2000=100 close *1

2016 0.8620 0.7308 17.95% 0.7771 128 0.7351

2015 0.7874 0.6930 13.62% 0.7263 119 0.7758

2014 0.8400 0.7755 8.32% 0.8063 132 0.8292

2013 0.8747 0.8099 8.00% 0.8493 139 0.8103

2012 0.8505 0.7753 9.70% 0.8115 133 0.8336

2011 0.9042 0.8283 9.16% 0.8681 142 0.8533

2010 0.9148 0.8086 13.13% 0.8579 141 0.8952

2009 0.9649 0.8397 14.91% 0.8915 146 0.9551

2008 0.9803 0.7338 33.59% 0.7972 131

2007 0.7382 0.6553 12.65% 0.6845 112

2006 0.7006 0.6687 4.77% 0.6819 112

2005 0.7067 0.6624 6.69% 0.6839 112

2004 0.7093 0.6553 8.24% 0.6786 111

2003 0.7218 0.6480 11.39% 0.6920 114

2002 0.6529 0.6081 7.37% 0.6288 103

2001 0.6429 0.5967 7.74% 0.6220 102

2000 0.6389 0.5720 11.70% 0.6094 100

FX Market Trends – EUR/GBP

GBP

Average

Rate EUR

Year-on-year €

profit effect

Cumulative €

profit change

Year-on-year

profit margin %

effect

2016 1,000,000 0.8500 1,176,471 (200,371) (970) -17.03%

2016 1,000,000 0.8000 1,250,000 (126,842) 72,560 -10.15%

2016 1,000,000 0.7772 1,286,726 (90,116) 109,285 -7.00%

2015 1,000,000 0.7263 1,376,842 136,608 199,401 9.92%

2014 1,000,000 0.8063 1,240,233 62,793 62,793 5.06%

2013 1,000,000 0.8493 1,177,440

Other FX Implications

• Possible to hedge? Does you Treasury provider offer such services?

• What hedging instruments can be used? (Spot/Forward/Options)

• How far forward can one hedge?

• Security implications of the provision of hedging lines?

• Mark-to-market issues? (Margin call)

• Breakeven FX rate for UK sales? (Pinch point)

• Have a Treasury policy. Stick to it & review it regularly!

Developing a Treasury policy

Portfolio Approach

Forwards

Vanilla Options

Spot

Key things to consider:

• Know the risks.

• Know the tools at your disposal.

• Know what your competitors are doing.

• Do a scenario analysis.(Worst case scenario)

• Talk to your FX Provider.

• Know what works for your business.

• Make sure your Hedging Strategy is appropriate.

Disclaimer

Investec Capital & Investments (Ireland) Limited has issued and is responsible for production of this publication. Investec Capital & Investments (Ireland) Limited trading as Investec Wealth &Investment and Investec is regulated by the Central Bank of Ireland. Investec Capital & Investments (Ireland) Limited is a member of the Irish Stock Exchange and the London Stock Exchange.

This publication should be regarded as being for information only and should not be considered as an offer or solicitation to sell, buy or subscribe to any financial instruments, securities or any derivativeinstrument, or any other rights pertaining thereto (together, “investments”). Investec Wealth & Investment does not express any opinion as to the present or future value or price of any investmentsreferred to in this publication. This publication may not be reproduced without the consent of Investec Wealth & Investment.

The information contained in this publication has been compiled from sources believed to be reliable, but, neither Investec Wealth & Investment, nor any of its directors, officers, or employees acceptsliability for any loss arising from the use hereof or makes any representations as to its accuracy and completeness. The information contained in this publication is valid as at the date of this publication.This information is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the matters discussedherein.

This publication does not constitute investment advice and has been prepared without regard to individual financial circumstances, objectives or particular needs of recipients. Readers should seek theirown financial, tax, legal, regulatory and other advice regarding the appropriateness or otherwise of investing in any investments or pursuing any investment strategies.

An investment in any of the investments discussed in this publication may result in some or all of the money invested being lost. Past performance is not a reliable guide to future performance. To theextent that this publication is deemed to contain any forecasts as to the performance of any investments, the reader is warned that forecasts are not a reliable indicator of future performance. The valueof any investments can fall as well as rise. Foreign currency denominated investments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price orincome of such investments. Certain transactions, including those involving futures, options and other derivative instruments, can give rise to substantial risk and are not suitable for all investors.

Investec Wealth & Investment (or its directors, officers or employees) may to the extent permitted by law, own or have a position in the investments (including derivative instruments or any other rightspertaining thereto) of any issuer or related company referred to herein, and may add to or dispose of any such position or may make a market or act as a principal in any transaction in such investmentsor financial transactions.

Investec Wealth & Investment’s conflicts of interest policy is available at http://www.investec.ie/legal/uk/conflicts-of-interest.html.