Brexit means Brexit…but what does Brexit mean for the TMT sector?

The markets were gentle on TMT (Technology, Media and Telecommunications) in the immediate post-referendum adjustment.

The immediate market reaction in the first week after the referendum on the UK’s membership of the EU led to little change in TMT stocks. This suggests the view was that the TMT sectors were neither significantly exposed to a domestic slowdown nor likely to benefit from higher exports to emerging markets as a result of the falling pound.


Four weeks on and the story has not changed significantly. The Technology and Media sectors have strengthened slightly and Telecoms has slipped a little but all are very minor moves. The impression is that it appears the general view is that the TMT sectors are not overly exposed to the risks of Brexit.

Chart 2

We need to look longer-term to understand the true potential impact.

Brexit is unique: no developed economy has imposed a shock on itself of this potential scale. Brexit is a political rather than an economic shock and as such the long-term impact will depend on the interplay of political and economic factors. Three areas will be critical in shaping the long-term outcome:

  • The development of the UK economy over the next few years as the country moves towards Brexit;
  • The negotiations between the UK and the EU, and between the UK and other countries, which together will shape the future international relations of the UK; and
  • Government policy to support and develop the UK economy over the next few years.

The economy will be challenging…

The EY ITEM Club Summer 2016 forecast confirms that the domestic economy faces a challenging period going forward. EY ITEM Club is more positive about 2016 but more negative about 2017 than consensus. Broadly speaking, consensus is that aggregate GDP growth for 2016 and 2017 will be about 40% down on the level forecasters expected in the spring.

…but it is too early to call…

On the economy, despite a fall in confidence, consumer spending seems to be under less pressure than business spending. Investment and exports should be stronger supported by a lower pound. The likely developments in the key economic indicators which are most significant for TMT are:

  • Nominal interest rates will be at or close to zero for the next 2 years and real rates will be negative;

Chart 3


  • The pound is likely to weaken further and we should assume this lower level will become the norm, the UK’s current account deficit and the shock to trade from leaving the EU are likely to weigh heavily on the currency;


Chart 4

  • Inflation will return and could be running at around 2% by the end of the year or in early 2017. This could accelerate if labour market pressures caused by a fall in immigration lead to wage rises.


Chart 5


Brexit means Brexit…but what does Brexit mean?

Changes in three areas will drive the impact of Brexit on the UK and hence on the TMT businesses in the medium to long-term:

  • Trade policy;
  • Immigration; and
  • Regulation

The appointment of trade ministers has given us a first set of clues as to the future trade strategy. With a clear commitment to reduce immigration by all Ministers who have spoken about it, it seems highly unlikely that the UK could join the EEA. This leads to a future based on a bilateral deal, or a series of, with the EU.

Logic would suggest that a deal on goods should be achievable – the balance of trade between the UK and EU in aggregate and at a country level should make this attractive to most players. Goods trade is also the area easiest to fix in trade deals generally. By contrast, services and especially financial services will be tougher. The UK runs a huge surplus with the EU, averaging more than £10 billion annually in financial services, and it seems likely that EU countries will try to capture some of this activity.

We might see a bilateral deal by 2019 or possibly a default to WTO rules at that time followed by a bilateral deal in future. We can also expect the UK will start unofficial trade talks with the USA and India plus other Commonwealth and Middle East countries, with the aim of having deals in place in 2019 or as soon as possible afterwards. It is possible that the UK as a one country bloc will be able to secure competitive deals with non-EU countries faster than the EU has been able to.

Migration remains the key challenge and we are already hearing anecdotal reports of recruitment challenges and staff unease. The UK’s future labour and skills strategy is the area we know least about currently although it is possibly the most urgent area to resolve.

Regulatory change will be driven in the first instance by the trade negotiations. Other than a few possible head line grabbing moves, most of the action is likely to be post 2019 giving companies a chance to plan and position. The more urgent need is to position for and actively lobby to shape UK Government policy given the signals for change that we have witnessed in recent weeks.

What does this all mean for TMT?

The immediate impact is likely to be via the economy. Business investment may slow and consumer spending too, both of which may impact the customer base of TMT companies. Advertising spend may well be under pressure hitting media companies in particular. The weaker pound may benefit exports but the UK’s imports of technology equipment both phones and devices for consumers and technology for businesses and networks will become more expensive – margins may come under pressure.

Longer-term, the signs that the UK Government will be more interventionist may mean that the regulatory regime is subject to change. Broadband provision and mobile coverage tend to come and go on the political radar, it is possible that they will be very much back in the spotlight. On the other hand, the desire to use public spending to invest in productivity enhancing technologies could create opportunities for TMT companies. Schemes which boost economic potential and create opportunities in regions outside of London may well be eligible for public support via grants, tax incentives or investment funding.

The labour market, especially for skilled staff could be challenging if the UK moves to restrict immigration. At the same time, the development of skills and improving educational attainment is likely to be a priority and TMT sector companies should consider how they can contribute to this aim.

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