London: It isn't so bad after all
Contrary to reports that London is at risk of losing its position as a top financial centre, the capital is actually "outwitting its pretenders one by one", according to Michael Power, global strategist at Investec Asset Management. Here Financial News gives Power's reasoning.
Earlier this week, private equity heavyweight Guy Hands, chairman of Terra Firma, and hedge fund manager Crispin Odey said that they would leave the UK due the new 50% tax bracket for high earners.
However, in comments published today, Investec's Michael Powers argues that there are very few reasons for any organisation to move away from London. His words are copied in full below:
The UK Government was presented last week with a wishlist by the Financial Services Global Competitiveness Group, set up by the UK Chancellor of the Exchequer, which outlined the long-term aim to ensure London’s status as a top financial centre. Whatever the outcome of this request, far from seeing its position impaired, London is arguably using the current crisis to reinforce its primary position in world finance. Within London’s effective time zone (which effectively extends from Tokyo and Sydney eastward to San Francisco westward), London is outwitting its pretenders one by one:
• Dublin, which originally undercut London due to its much lower back office costs, is now by some estimates 40% more expensive than London due to Eire being in the euro zone. The fall in the pound vs. the euro has done wonders for London’s competitiveness. Frankfurt and Paris are facing similar competitive pressures.
• Both Zurich and Geneva have lost ground to London in the private banking sphere recently. The compromise of Swiss banking secrecy in the wake of the virtual capitulation by the Swiss authorities to the demands of the US tax office has been a major contributing factor in this shift.
• Dubai, at least for the time being, seems temporarily hamstrung due to widespread problems in its overheated property market, concerns about some of its leading real estate developers and tight liquidity conditions – especially in the US Dollar inter-market – prevailing in Emirati money markets.
• Luxembourg, due to under-appreciated changes in UK law (essentially relating to the UK’s new “tax elected funds regime”) is no longer materially more competitive than London in the issue of choosing where to site mutual and hedge funds.
• Even Hong Kong’s longstanding vantage point within the Far East is now under threat; the Chinese have signalled that they want a still-to-be developed Shanghai to be “their” financial capital. It seems unlikely that Shanghai will inherit Hong Kong’s mantle; some may well "defect" to London. • New York will likely feel the hand of legislation far more heavily than London in the wake of financial problems in the US. Already reeling from the fallout of Sarbannes-Oxley, New York most likely faces even tighter controls at both State (courtesy of Governor Cuomo) and Federal (courtesy of President Obama) levels. In a majority of financial fields – forex trading, international loan syndication (and not merely in Eurodollars), fund management, OTC derivative trading, foreign company IPOs, trading in foreign equities – London leads New York today. Note that when it came to the identifying the key metric behind US mortgage rates, it was a London-determined interest rate, Libor, which ruled the waves.
Other factors operating in London’s favour include:
• London is quietly backed up by a bevy of tax havens sheltering under the British umbrella; these tax havens will survive largely intact in the coming clamp down. Most were early signatories to the new code of good practice: the Caymans Islands (hedge funds and LLPs), Bermuda (insurance), Gibraltar (internet gambling), and the Channel Islands and Isle of Man (both Family Trusts).
• The 2012 Olympics will ensure that capital continues to flow into London’s transport infrastructure. As it is, the infamous “transport deficit” is narrowing with even T5 now overcoming its shaky start.
• The UK government backed down on a majority of the restrictions it considered imposing on the “Non-doms” living in London.
• The English language remains the world’s primary business language of communication, with around 1.5 billion people speaking English as a primary, auxiliary or business language. Only Mandarin is spoken by a greater number of people and even in China, English is now unchallenged as the second language to be taught in schools.
There are few compelling reasons why companies might move away from London in the current climate, though the far-sighted and imaginative might also consider developing a base in Shanghai. London will weather the storm and conceivably it might use the current downturn to strengthen its primus inter pares status when it comes to the world’s financial capitals. As a footnote, apparently when China’s State Administration of Foreign Exchange – the organisation charged with managing its near $2 trillion (€1.5 trillion) of forex reserves – originally surveyed the world as to where they might set up their first foreign office, the only unqualified welcome they received was from London.
-- write to mturner@efinancialnews.com
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