£20bn exchanges tie-up under spotlight
Selling up is almost certainly a mistake – and there may be openings
THE London Stock Exchange and its wouldbe merger partners the Deutsche Borse in Germany are to call a special referendum committee to examine the effect of Brexit on the controversial deal.
The £20billion merger was agreed in March and last week’s shock vote will now be examined by the committee, including three directors from each stock exchange, amid growing pressure for the agreement to be changed.
A spokesperson from the Deutsche Borse said: ‘The Referendum Committee will now examine all regulatory, legal and jurisdictional consequences for the merger arising from the vote for Brexit as well as its implications for the ongoing operations of the future Deutsche BorseLSE combination.’
The deal is already coming under pressure after top German politicians said the new group can no longer be headquartered in London as previously planned.
Dr Michael Fuchs, vice chairman of Germany’s ruling CDU party, said: ‘Things have changed and the Brexit vote has consequences. The merged company cannot be based in London.’
Last Friday, the London and German stock exchanges put out a joint announcement, stressing they remain committed to the merger and ‘the agreed and binding merger terms,’ which would include the location for the group’s HQ.
Privately however, people within the German exchange suggest that even though the London HQ has been described as non-negotiable, all bets are off after the vote.
‘Everything is under discussion. It’s a complex deal, with a lot of pressure points,’ said one Deutsche Borse source.
FROM the moment that Prime Minister David Cameron called the EU referendum back in February, the City began to brace itself for the impact that a vote to leave would have on financial markets.
Most of the ‘experts’ whom Michael Gove scorned during the campaign suggested that Brexit would send sterling crashing against other currencies – and so it has. But the effect on the stock market has been less dramatic than feared.
By the time the market closed on Friday, the FTSE 100 Index was down just 3.15 per cent, while the FTSE 250 Index was down 7.2 per cent. This is because the FTSE 100 includes more companies with business activities around the world. The FTSE 250 is more focused domestically, so its decline reflects concerns about UK economic growth.
Some investors may be tempted to cash in their shares now, fearful that we are heading into a period of depression and economic decline. For long-term investors, however, that would almost certainly be the wrong decision.
First, it is still unclear what will happen. For the moment, the UK is still part of the European Union and prolonged negotiations are needed to work out how we will interact with the EU and other parts of the world. Shares may remain volatile, but it is certainly too soon to take a definitive view on winners and losers.
Second, immediate market reaction is often overdone. That was clear even on Friday. Stocks fell sharply when the market opened but regained some ground that day. There may be more bounce-backs in the coming days and weeks.
Third, the Brexit vote may present opportunities. Sterling weakness, as Midas said last week, can be good for export-focused firms and those paying dividends in US dollars. Hence drugs giants AstraZeneca and GlaxoSmithKline, global consumer goods group Unilever and computer chip-maker ARM Holdings saw their shares rise on Friday. British American Tobacco and another tobacco producer Imperial Brands were up too, as was miner Randgold Resources.
Banks, insurers and housebuilders were among the biggest fallers but some market-watchers believe the financial stocks – such as Lloyds Banking Group, Royal Bank of Scotland, Aviva and Prudential – have been oversold. Adventurous investors may want to take a closer look at these.
After the Battle of Waterloo, banker Nathan Rothschild allegedly said: ‘The time to buy is when there is blood on the streets.’ He is said to have made a fortune by following that advice.