Despite current geopolitical and financial market volatility, investment plans into Europe over the next three years are strong, with 56 per cent of global investors planning to grow their presence in Europe, according to the EY 2017 European attractiveness survey – Plan B for Brexit. This contrasts with the findings from the EY survey conducted last May, which found that only 36 per cent of European investors had a positive investment outlook for Europe.
Investors cited instability on the continent as their primary concern in respect to future investment plans. However, Europe’s talent, innovation capacity and large, integrated market and production system are still valued by global investors.
Of the 254 global investors surveyed, high volatility in currencies, commodities and capital markets was identified as the biggest risk to investment decisions in Europe (37 per cent), while economic and political instability within the European Union (EU), excluding Brexit, (32 per cent) and the impact of Brexit (28 per cent) were identified as the second and third biggest risks respectively.
Andy Baldwin, EY area managing partner for Europe, Middle East, India and Africa, said: “It is encouraging that the investors we are tracking continue to have strong investment appetite in Europe despite the instability and mixed geopolitical environment. However, investor patience is finite. Europe’s historical investor appeal was built on certainty and predictability. Europe is in danger of developing an emerging market ‘geopolitical risk profile’ without commensurate retrns. For the foreseeable future, pure economic factors will vie alongside political considerations in influencing finalinvestment decisions.”
Heightened geographic and political risks across Europe and the UK are prompting one in 10 companies with a presence in Europe to review their geographical footprint. However, the survey finds that the UK’s EU referendum result is a far bigger concern for foreign companies established in the UK (33 per cent), compared with those that are not (15 per cent). Companies not established in the UK cite geopolitical and wider EU instability (31 per cent), coupled with the slowdown in trade flows (30 per cent) as more urgent concerns.
High volatility in currencies, commodities and capital markets was identified as the biggest risk to investment decisions in Europe
Fourteen per cent of foreign investors with a presence in the UK plan to change or relocate some of their European operations in the next three years should the UK leave the European single market. Overall, 11 per cent plan to modify their UK presence in Europe following Brexit. Germany was identified as the preferred destination for those investors moving out of the UK (54 per cent), followed by the Netherlands (33 per cent) and France (eight per cent).
Hanne Jesca Bax, EY EMEIA managing partner for markets & accounts, said: “Investment appetite across Europe is growing but business structures will need to flex to accommodate future and unpredicted changes. Mitigating the impact of possible increases in import costs, for example, will be critical. But businesses should not only address the risks. They should also seek opportunities to capture new business and improve operational efficiency as they strive to grow and expand their business.”
Financial services (FS) companies are the least optimistic about their growth prospects in Europe over the next three years: only 12 per cent anticipate strong growth, while six per cent expect to “slightly reduce” their existing presence in the region. FS firms are also nearly twice as likely as manufacturing firms to identify EU instability (51 per cent) and Brexit (41 per cent) among the top three growth risks, with volatility seen as a much less severe risk.
The technology sector is leading growth into Europe with 72 per cent of respondents planning to invest in Europe in the next three years and, of those, 33 per cent expecting to grow their presence significantly – identifying Europe as a powerhouse in emerging technologies such as artificial intelligence, the Internet of Things and robotics.
More than 70 per cent of foreign investors say they have already felt some impact following the UK’s referendum on EU membership. These investors have seen an impact in at least one area of their business operations in Europe and have cited operating margins, cost of purchase and sales, in particular.
Companies with a strong presence in the UK were hit the hardest, with 31 per cent reporting an increase in purchase costs and the same percentage identifying operating margin pressures.
Assessing and managing the immediate impact of Brexit on costs (largely import-driven) and supply chain are fundamental concerns for respondents, with 32 per cent and 27 per cent respectively highlighting these as urgent agenda items. Despite concerns over the geopolitical environment, only four per cent of respondents report being well-prepared for the uncertainty arising from new risks and a changing regulatory environment.
Baldwin concluded: “The financial impact of Brexit is not confined to the UK. The survey shows that 70 per cent of European businesses we surveyed have been impacted in some way. European businesses and investors need certainty and want clarity on the future trading relationship between the UK and the EU27. In the meantime, we will likely see a pick-up in businesses reconfiguring supply chains and distribution arrangements to mitigate currency volatility and cost pressures. Flexibility and agility will be key.”