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| It's a folly to dismiss City warnings over Brexit transition deal delay | It's a folly to dismiss City warnings over Brexit transition deal delay |
| (4 months later) | |
| It is no longer possible to dismiss gloomy predictions, as some Brexiters do, as a flight of fancy – there is a real shift on the ground | |
| Tue 17 Oct 2017 06.20 BST | |
| First published on Tue 17 Oct 2017 00.01 BST | |
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| TheCityUK is a lobbying group whose dire warnings about the potential loss of trade and jobs from the City of London tend to infuriate true believers in Brexit. Too gloomy, say hardcore Brexiters. A few jobs may go, runs their argument, but Frankfurt, Paris, Luxembourg and Dublin are too small to inflict lasting damage on London. Besides, the rest of the EU will come to its senses eventually and realise that a fragmented European financial industry would serve nobody’s interests, apart from perhaps New York’s. | TheCityUK is a lobbying group whose dire warnings about the potential loss of trade and jobs from the City of London tend to infuriate true believers in Brexit. Too gloomy, say hardcore Brexiters. A few jobs may go, runs their argument, but Frankfurt, Paris, Luxembourg and Dublin are too small to inflict lasting damage on London. Besides, the rest of the EU will come to its senses eventually and realise that a fragmented European financial industry would serve nobody’s interests, apart from perhaps New York’s. |
| There is some truth in those objections, of course, since it is true that London currently plays in a different league as a European financial centre. But it is also time for all sides to acknowledge TheCityUK was 100% correct on a common-sense point it has shouted from the rooftops from the outset: a transitional deal that is signed at the eleventh hour of negotiations won’t be worth much. | There is some truth in those objections, of course, since it is true that London currently plays in a different league as a European financial centre. But it is also time for all sides to acknowledge TheCityUK was 100% correct on a common-sense point it has shouted from the rooftops from the outset: a transitional deal that is signed at the eleventh hour of negotiations won’t be worth much. |
| Sam Woods, a deputy governor of the Bank of England, captured the argument when he said “diminishing marginal returns” would start to kick in around Christmas. “Firms would start discounting the likelihood of a transition in the central case of their planning,” he said. | Sam Woods, a deputy governor of the Bank of England, captured the argument when he said “diminishing marginal returns” would start to kick in around Christmas. “Firms would start discounting the likelihood of a transition in the central case of their planning,” he said. |
| Indeed, there was more than a whiff of contingency plans being executed when Goldman Sachs said this month it will lease eight floors of new office block in Frankfurt, enough to house 800 people. Does Goldman actually want to add 800 jobs in Frankfurt? One suspects not. Like most big London-concentrated investment banks, it would prefer Brexit to involve as little disruption to its business as possible. But, in the absence of transitional deal, it has to cover all possibilities. For Goldman et al, it doesn’t matter if UK division or EU belligerence is mostly to blame for the current stalemate. Banks just look at their own interests, which means keeping clients and local regulators happy. | Indeed, there was more than a whiff of contingency plans being executed when Goldman Sachs said this month it will lease eight floors of new office block in Frankfurt, enough to house 800 people. Does Goldman actually want to add 800 jobs in Frankfurt? One suspects not. Like most big London-concentrated investment banks, it would prefer Brexit to involve as little disruption to its business as possible. But, in the absence of transitional deal, it has to cover all possibilities. For Goldman et al, it doesn’t matter if UK division or EU belligerence is mostly to blame for the current stalemate. Banks just look at their own interests, which means keeping clients and local regulators happy. |
| TheCityUK may have examples like Goldman’s in mind when it now warns of decisions by firms becoming “increasingly irreversible, resulting in activities being permanently located outside the UK”. As it says, companies don’t like having double running costs. The lobby group’s own approximate deadline for a transitional arrangement to be useful is the first quarter of next year “at the latest”. That is as good a guess as any. | TheCityUK may have examples like Goldman’s in mind when it now warns of decisions by firms becoming “increasingly irreversible, resulting in activities being permanently located outside the UK”. As it says, companies don’t like having double running costs. The lobby group’s own approximate deadline for a transitional arrangement to be useful is the first quarter of next year “at the latest”. That is as good a guess as any. |
| The most gruesome predictions of the eventual whack to the City – up to 75,000 and £8bn-£10bn in lost tax revenues – still feel too dramatic. But it’s no longer possible to dismiss the figures, as some Brexiters do, as a flight of fancy. Events are happening on the ground. | The most gruesome predictions of the eventual whack to the City – up to 75,000 and £8bn-£10bn in lost tax revenues – still feel too dramatic. But it’s no longer possible to dismiss the figures, as some Brexiters do, as a flight of fancy. Events are happening on the ground. |
| How ConvaTec fell ill | How ConvaTec fell ill |
| ConvaTec is one of those FTSE 100 companies that rarely commands attention because its business – making medical products such as colostomy bags, catheters and wound care treatments – seems so dull. How wrong we were. ConvaTec managed to remove 25% of its stock value, equivalent to £1.3bn, with a thumping profits warning on Monday. | ConvaTec is one of those FTSE 100 companies that rarely commands attention because its business – making medical products such as colostomy bags, catheters and wound care treatments – seems so dull. How wrong we were. ConvaTec managed to remove 25% of its stock value, equivalent to £1.3bn, with a thumping profits warning on Monday. |
| ConvaTec has made a botch of the superficially simple job of shutting a factory in North Carolina in the US and shifting its production to the Dominican Republic. The move didn’t go as planned, output was constrained and a backlog of orders built up. A hurricane didn’t help the dispatch of goods either. | ConvaTec has made a botch of the superficially simple job of shutting a factory in North Carolina in the US and shifting its production to the Dominican Republic. The move didn’t go as planned, output was constrained and a backlog of orders built up. A hurricane didn’t help the dispatch of goods either. |
| The company may call this is “a temporary but painful setback” but you can understand why the shares were savaged. First, there should have been a better back-up plan: ConvaTec could have held more stock in reserve. Second, the company undermined its big pitch to investors at flotation last year. The promise was that gross margins could be improved by three percentage points by 2020 but, while the ambition remains, the arrival date is now up in the air. | The company may call this is “a temporary but painful setback” but you can understand why the shares were savaged. First, there should have been a better back-up plan: ConvaTec could have held more stock in reserve. Second, the company undermined its big pitch to investors at flotation last year. The promise was that gross margins could be improved by three percentage points by 2020 but, while the ambition remains, the arrival date is now up in the air. |
| Third, ConvaTec has destroyed the easy idea that a big operator in a growing market could be relied upon to improve revenues at an annual clip of 5% or so. Organic growth will be between 1% and 2% this year, the company says now. | Third, ConvaTec has destroyed the easy idea that a big operator in a growing market could be relied upon to improve revenues at an annual clip of 5% or so. Organic growth will be between 1% and 2% this year, the company says now. |
| Is it completely coincidental that ConvaTec was owned by two private equity houses before last year’s float at 225p? Private equity, remember, has a reputation for hollowing out businesses before offering them for sale. On this occassion, however, it’s hard to make the charge stick. Nordic and Avista may have flogged the bulk of their stake at prices far higher than Monday’s closing level of 205p, but the production cock-up seems to a straightforward case of over-ambition and bad planning. | Is it completely coincidental that ConvaTec was owned by two private equity houses before last year’s float at 225p? Private equity, remember, has a reputation for hollowing out businesses before offering them for sale. On this occassion, however, it’s hard to make the charge stick. Nordic and Avista may have flogged the bulk of their stake at prices far higher than Monday’s closing level of 205p, but the production cock-up seems to a straightforward case of over-ambition and bad planning. |
| That nuance, however, won’t help to restore ConvaTec’s City reputation. Famous chairman Sir Christopher Gent, once of Vodafone and GlaxoSmithKline, has his work cut out. | That nuance, however, won’t help to restore ConvaTec’s City reputation. Famous chairman Sir Christopher Gent, once of Vodafone and GlaxoSmithKline, has his work cut out. |
| Aramco IPO and China | Aramco IPO and China |
| Saudi Arabia’s latest idea, it is reported, is to forget about an international listing for Aramco, the state oil company, and instead flog a 5% stake to Chinese investors. This plan could definitely be achieved since China would probably be willing to play ball, and might even pay a higher initial price than international investors would. | Saudi Arabia’s latest idea, it is reported, is to forget about an international listing for Aramco, the state oil company, and instead flog a 5% stake to Chinese investors. This plan could definitely be achieved since China would probably be willing to play ball, and might even pay a higher initial price than international investors would. |
| But it’s hard to see how the Saudis’ long-term interests would improve. If the country’s rulers want permanent access to ready cash, they need to widen the pool of investors in Aramco. Having to ring Beijing when you want to sell the next 5% is not a good position to be in. | But it’s hard to see how the Saudis’ long-term interests would improve. If the country’s rulers want permanent access to ready cash, they need to widen the pool of investors in Aramco. Having to ring Beijing when you want to sell the next 5% is not a good position to be in. |
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| Nils Pratley on finance | |
| Brexit | |
| European Union | |
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