Strong global investment appetite into Europe despite geopolitical instability

Global investors still plan to grow their presence in Europe despite geopolitical and financial instability, an Ernst&Young survey has found

Sasha Shumara
6 February 2017, 4:36pm
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
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
Despite current geopolitical and financial market volatility, investment plans into Europe over the next three years are strong, with 56% of global investors planning to grow their presence in Europe, according to the Ernst&Young 2017 European attractiveness survey – Plan B for Brexit.

These figures contrast with the findings from the Ernst&Young (EY) survey conducted last May, which found that only 36% of European investors had a positive investment outlook for Europe.

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%), while followed by economic and political instability within the European Union (EU), excluding Brexit, (32%) and the impact of Brexit (28%).

According to EY, investors cited instability across Europe 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, they 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,” Andy Baldwin, EY area managing partner said. “However, Europe is in danger of developing an emerging market ‘geopolitical risk profile’ without commensurate returns. For the foreseeable future, pure economic factors will vie alongside political considerations in influencing final investment decisions”.

The lines of Europe’s foreign direct investment map are starting to shift

EY said that 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.

“Agility is key for businesses to succeed in a volatile landscape. 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,” Hanne Jesca Bax, EY EMEIA managing partner for markets & accounts, said.

The survey found that the UK’s Brexit vote is a far bigger concern for foreign companies established in the UK (33%), compared with those that are not (15%). 14% 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, the survey found. Overall, 11% plan to modify their UK presence in Europe following Brexit, with Germany being identified as the preferred destination for those investors moving out of the UK (54%). The Netherlands and France followed with 33% and 8% saying they were preferred destinations.

“But businesses should not only address the risks,” Jesca Bax added. “They should also seek opportunities to capture new business and improve operational efficiency as they strive to grow and expand their business,”

Brexit impact on financial services, technology and mid-sized companies

From the survey results, financial services companies were shown to be the least optimistic about their growth prospects in Europe over the next three years: only 12% anticipate strong growth, while 6% expect to “slightly reduce” their existing presence in the region. Financial services firms are also nearly twice as likely as manufacturing firms to identify EU instability (51%) and Brexit (41%) 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% of respondents planning to invest in Europe in the next three years, and of those, 33% expecting to grow their presence significantly, EY said. They added that mid-sized companies are also driving growth, with more than two-thirds expecting to grow their presence in Europe and 26% planning significant expansion.

Brexit reshaping boardroom agendas

According to EY, more than 70% of foreign investors have said they have already felt some impact following the UK’s referendum on EU membership. These investors have reportedly 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, the survey found, with 31% reporting an increase in purchase costs and the same percentage identifying operating margin pressures.

Assessing and managing the immediate impact of Brexit on costs and supply chain were fundamental concerns for respondents, with 32% and 27% respectively highlighting these as urgent agenda items.

“The financial impact of Brexit is not confined to the UK. The survey shows that 70% of European businesses we surveyed have been impacted in some way,” Baldwin said.

Despite concerns over the geopolitical environment, only 4% of respondents report being well-prepared for the uncertainty arising from new risks and a changing regulatory environment.

“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,” he added.