Ernst & Young survey: Investment appetite for Europe remains strong

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 EY 2017 European attractiveness survey – Plan B for Brexit, released on Tuesday.

The survey noted that this contrasted with the findings from the EY survey conducted last May, which found that only 36% of European investors had a positive investment outlook for Europe.

Investors cited instability on the continent 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. 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 economic and political instability within the European Union (EU), excluding Brexit, (32%) and the impact of Brexit (28%) were identified as the second and third biggest risks respectively.

Heightened geographic and political risks across Europe and the UK are prompting 1 in 10 companies with a presence in Europe to review their geographical footprint. However, the survey finds that the UK’s EU referendum result is a far bigger concern for foreign companies established in the UK (33%), compared with those that are not (15%). Companies not established in the UK cite geopolitical and wider EU instability (31%), coupled with the slowdown in trade flows (30%) as more urgent concerns.

Fourteen percent 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. Overall, 11% plan to modify their UK presence in Europe following Brexit. Germany was identified as the preferred destination for those investors moving out of the UK (54%), followed by the Netherlands (33%) and France (8%).

The average growth rate of the Eurozone was 0.3 pct in the third quarter of 2016 compared with the previos quarter, while Greece, with a growth rate of 0.8 pct, ranked second along with Portugal among Eurozone states after Slovenia (which recorded an 1.0 pct growth rate).

Andy Baldwin, EY Area Managing Partner – Europe, Middle East, India and Africa, 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. However, investor patience is finite. Europe’s historical investor appeal was built on certainty and predictability. 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.”

Financial services (FS) companies are 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. FS 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 – identifying Europe as a powerhouse in emerging technologies such as artificial intelligence (IA), the Internet of Things (IoT) and robotics. Mid-sized companies1 are also driving growth, with more than two-thirds expecting to grow their presence in Europe and 26% planning significant expansion.

More than 70% of foreign investors say they have already felt some impact following the UK’s referendum on EU membership. These investors have 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, 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 (largely import-driven) and supply chain are fundamental concerns for respondents, with 32% and 27% respectively highlighting these as urgent agenda items. 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.