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Future of the City: Where did all the jobs go?

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For months after the Brexit referendum, Japanese bankers were invited on tours of Frankfurt. They would take in a football match and meet one of the local club’s star players: Makoto Hasebe, former captain of Japan’s national team.

Impressed by the German city’s clean air, green spaces and family-friendly atmosphere, most of the bankers switched their plans to establish a post-Brexit EU base in Amsterdam and opted for Frankfurt instead.

“One of the biggest issues we have with people is to get them here to see it and then they are pleasantly surprised by what they find,” said Hubertus Väth, head of the Frankfurt Main Finance lobby group.

Mr Väth admits, however, that his headline-grabbing prediction on the day after the Brexit referendum in June 2016 — that 10,000 jobs would shift from London to Frankfurt — has failed to materialise. Instead, he now believes Brexit created about 3,000 extra jobs in the German financial capital by June, including related consultants and IT services providers.

“We expect another 1,000 jobs to come in the following months, which may extend into early next year as 500 jobs are still being negotiated with regulators because of the Covid-19 situation,” said Mr Väth. “The traders have been the big holdouts so far.”

When Britain voted to leave the EU — a process culminating in the end of the transition period on December 31 — it prompted a scramble by rival financial centres across Europe. They were competing to attract the many jobs and assets expected to leave London as Brexit threatened the UK’s access to the bloc’s single market.

La Défense business district west of Paris © Christophe Archambault/AFP/Getty

France, Italy, the Netherlands and Spain introduced special tax breaks for wealthy financiers relocating to their countries. Germany changed its rigid labour law to make it easier for companies to fire highly paid “risk-takers” including traders in investment banks.

Emmanuel Macron, France’s president, even welcomed 140 global industry and banking bosses to dinner at the Palace of Versailles in 2018, urging them in English to “Choose France”.

Despite all this courting, the expected flood of bankers leaving London has so far proved to be more of a trickle. And the spoils are spread between many different cities. Most investment bankers and traders headed to Frankfurt and Paris, while asset managers favoured Luxembourg, and back-office operations have gone to Dublin and Warsaw.

France’s President Emmanuel Macron (centre right) and Bill McDermott, chief executive of SAP (centre left), during the “Choose France” summit at the Palace of Versailles © Thibault Camus/AFP/Getty

Christian Noyer, a former French central bank governor, said Brexit would herald a return to a time before “Big Bang” — the deregulation of the City of London in the 1980s — when finance was much less concentrated in one place.

“If we go back 30, 40 years, there was a time when the financial centre was much less concentrated in London . . . when banks had more staff in Paris than in London,” he said. “The moves might have been slowed down by Covid-19, but we are going to have lots more of these traders moving at the end of this year and all through next year.”

Future of the City

In a series of articles, the FT examines how London’s financial centre will fare in the decades ahead as Brexit negotiations reach their climax

French bank Société Générale has moved about 300 jobs out of London. “All banks had to rebalance,” said Frédéric Oudéa, its chief executive. “The ones that had all their trading operations in London had to repatriate people to deal with eurozone-related activities. There was a certain shift, but the magnitude has been relatively moderate.”

Doomsday predictions in a London Stock Exchange survey in 2016 estimated that 232,000 financial services jobs could leave the UK as a result of Brexit.

Not only have far fewer jobs left the country, but many footloose financiers continue to operate at least partially in London — commuting back and forth each week between the city and the continent, at least before the pandemic complicated travel.

David Benamou, chief investment officer at French asset manager Axiom Alternative Investments, set up a UK offshoot of the company in 2013. He has lived in London ever since, while also spending one night a week in a hotel next to its Paris headquarters.

About 3,500 financiers have moved to the French capital since the Brexit vote, according to the Paris Europlace lobby group, including senior executives from Bank of America, JPMorgan and BlackRock. But Mr Benamou is among those betting that the City will remain a big enough market with enough talent to make sticking around worthwhile.

“It took 20 years to build up London as the centre of world finance. So, tearing it down . . . I find it hard to believe that can take place in less than 10 years,” he said.

Yet Mr Benamou believes that instead of setting up in London and expanding into Europe, the opposite is happening. “Now if I had to start a business from zero, of course I would start from the continent, because there wouldn’t be any point starting from the UK,” he said.

The fountain in Piazza Gae Aulenti square in Milan © Emanuele Cremaschi/Getty

Davide Serra, founder of asset manager Algebris Investments and a big donor to the Remain campaign, remembers his son’s disappointment shortly after Brexit. This is partly why he relocated from London to Milan with his family in 2018.

“He told me he was sad and felt lost because we are Europeans. Through that feeling of being ripped apart I understood I wanted my British kids to have an international experience,” Mr Serra said. While Algebris has offices in Milan, Rome, Luxembourg and Dublin, he still flies back and forth to its London base for a few days each month, “Covid permitting”.

People moving to Frankfurt often start off by commuting back to the UK at the weekends, according to Daniel Ritter, executive partner at Von Poll, a German estate agent. “A lot of buildings here were refurbished as serviced apartments, as many of the bankers moving here leave their family in London and fly back there on Fridays,” he said.

After the Brexit vote, there were fears that other European cities would lack capacity in housing and schools to cope with the new arrivals. But Paul Fochtman, headmaster of Frankfurt International School, has only seen a steady trickle of Brexit-related admissions, which he estimated at just under 100 in total.

The Frankfurt skyline as seen from the 15th floor of the European Central Bank headquarters © Alex Kraus/Bloomberg

“We’ve always had people moving from London but there is a bit more urgency now,” he said.

Brexit also boosted applications from London for places at the bilingual École Jeannine Manuel in Paris, from 50-60 a year before Brexit to a peak of 264 last year. There was a dip in 2020, but Bernard Manuel, the school’s headmaster, said: “We see a substantial increase next year and many, many phone calls from major banks . . . one bank just told us they have 70 kids that need places.”

Jean Pierre Mustier, chief executive of Italian bank UniCredit, said it suited lenders to relocate some staff out of London after Brexit because of the UK capital’s high costs. “There will be an adjustment — it’s gravity at work,” he said. “Probably a lot of banks will look to relocate French staff to France, Italian teams to Italy and German teams to Germany.”

Deutsche Bank’s twin tower headquarters, beside the Frankfurter Sparkasse Tower in Frankfurt’s financial district © Alex Kraus/Bloomberg

More than 7,000 wealthy Italian expats chose to come back between 2017 and 2019, and benefited from a 50 per cent tax exemption on their Italian income, according to data from the tax administration. The exemption was increased to 70 per cent from this year. 

Another benefit, under which individuals pay a flat yearly €100k on their foreign income, has attracted footballers like Cristiano Ronaldo and private equity executives earning large sums of “carried interest” from buyout funds.

Luigi de Vecchi, Citigroup’s corporate and investment banking chairman for continental Europe, relocated from Milan to Paris three years ago. However, he has spent most of 2020 in his home country of Italy because of the pandemic. From here he watched a flurry of new arrivals. 

“I feel like a real-estate agency lately, I’ve had around 30 acquaintances ask me for advice on where to live in Italy,” he said. “People are willing to pay rentals that might be peanuts for the London market but are very high for Italy.”

With many banks allowing most staff to work remotely during the Covid-19 pandemic, some question whether they still need to move for Brexit. Yet supervisors at the European Central Bank suspect that lenders are dragging their heels on relocating staff and using coronavirus as an excuse. The ECB warned last month: “Remote working arrangements do not change the fundamental need to relocate staff to the EU.”

Even Deutsche Bank, which initially identified 4,000 jobs at risk of moving, has only shifted about 100 positions out of London to Frankfurt, with another 200 to 300 to follow. The timing and exact number of the extra moves hinges on regulatory and political decisions.

Frankfurt-based public lender Helaba estimates that about 1,500 positions have been moved to the city, and expects 2,000 to follow over the next two years. But that will not offset the jobs Frankfurt-based lenders are axing: overall banking jobs in the city are expected to fall 3 per cent to below 63,000.

“This is very regrettable,” said Helaba’s chief economist Gertrud Traud. “Banks that have to move jobs scrutinise very closely if they really do need those positions at all in the future.”

Additional reporting by Laura Noonan in New York, Owen Walker in London and Olaf Storbeck in Frankfurt



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Analysis

Rising interest rates cool sizzling rally in emerging markets

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The rush into emerging market assets since the depths of the coronavirus crisis a year ago is facing its first serious test as rising US interest rates revive memories of the “taper tantrum” of 2013.

Emerging market stocks sailed almost 90 per cent higher in US dollar terms from the nadir in March to a historic peak last week, according to MSCI’s broad index of equities in 27 countries. The surge stemmed in part from a ferocious hunt for returns after central bank stimulus depressed interest rates in developed markets to record lows.

But a sharp drop in developed-market government bond prices since the start of 2021 has sent borrowing costs sharply higher, and started to ripple into emerging markets. MSCI’s EM stock barometer has slipped about 5 per cent from last week’s high, reflecting drops in countries stretching from China to Turkey and Brazil.

“There’s no doubt that yield curve steepening worldwide is starting to spill over into other asset markets and the last thing we need right now is a full-blown bond and equity market sell-off,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

Line chart of % change in dollar terms showing EM stocks have slipped after a soaring start to 2021

To some analysts, the set-up this time around is similar to 2013, when investors fled EM assets as the US Federal Reserve signalled an end to the ultra-loose monetary policies that had given them such a boost.

Thin at BBH notes that the Fed will probably seek this time to reassure markets it will only slowly withdraw the extraordinary stimulus measures it deployed during the depths of the Covid-19 crisis.

Nevertheless, some sectors are feeling the pressure. Chinese markets, which have been among the best performers due to the country’s rapid recovery from coronavirus, have dropped over the past week.

The CSI 300 index of Chinese equities has fallen about 6 per cent on a dollar basis from its February high, while Shenzhen’s technology-focused ChiNext market is down 13 per cent. Turkey, another large EM, has endured a roughly 8 per cent decline since February 15, according to an MSCI index.

Meanwhile, Brazilian markets have faced serious ructions after Jair Bolsonaro, the populist rightwing president, fired the boss of state oil company Petrobras for failing to keep pump prices low.

Still, some analysts and investors argue that expectations for a brighter economic outlook in many countries will help dull the risk posed by rising global interest rates.

With vaccines coming into sight, says Tom Clarke, partner and portfolio manager at William Blair Investment Management, “you can argue about how many quarters there will be of lost or much reduced income but it’s the kind of thing you can look through, even if it’s a long way into the future. That has caused a sea change in EM equities and currencies.”

This, he says, is part of a more fundamental change. Before the pandemic, several factors were weighing against emerging markets: protectionism in the US and elsewhere, rising tensions between the US and China, the uncertainty over Brexit — all of which have been resolved, to a greater or lesser extent. 

“There have been worries about a hard landing in China for several years and, lo and behold, it delivered positive growth, last year of all years,” Clarke said.

Not all EMs will come out of the pandemic in equally good shape, however. One factor crucial to their prospects will be their ability to deliver productive investment.

As recent FT analysis shows, foreign direct investment slumped around the world last year but held up remarkably well across Asia. In China and India, it grew in 2020 by 4 per cent and 13 per cent, respectively. In contrast, Africa and Latin America registered the largest contractions of any regions for many components of FDI including mergers and acquisitions, project finance and greenfield investment — the kind that generates new jobs.

Line chart of % change in dollar terms showing Growth potential has lifted India from pandemic lows, while Brazil still flounders

Investors have also welcomed domestic spending. Part of India’s response to the pandemic has been to increase public spending on infrastructure by 50 per cent over its 10-year average. Brazil, where such investment has been squeezed for decades, has concentrated its pandemic response on subsidies for consumption — popular in political terms but less good for building growth.

Paul Korngiebel, emerging markets portfolio manager at Boston Partners, describes coronavirus as “the massively distorting event that creates winners and losers by [country and] industry sector as policy differs in response to Covid”.

Just as in advanced economies, the focus of many EM investors has been on tech. Over the past 12 months, shares in electric vehicle maker Tesla are up 350 per cent in New York. Shares in Nio, its Chinese rival, also listed in New York, are up more than 1,000 per cent.

Korngiebel worries that, in some sectors, investors may have brought too much future growth into the present and that some valuations are getting stretched. Conversely, he sees opportunities in sectors, such as regional airlines, that have been crushed, as investors have perhaps prematurely written them off.

“We are really dealing with the aftershock of Covid right now,” he says. “It’s not over from an investor point of view — the pig in the python is only half digested.”



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The UK mental health crisis coming in Covid’s wake

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Owen O’Kane grew up well-acquainted with the psychological damage that bombs and bullets inflict on communities long after their immediate impact, having witnessed first-hand the troubles in Northern Ireland.

Now a psychotherapist and author based in London, he is convinced that Covid-19 risks leaving similar long-term distress in its wake. In anticipation, he has given the phenomenon a name: “Post pandemic stress disorder.”

“A lot of people have been affected by trauma. Whether its PTSD (post-traumatic stress disorder) or PPSD you won’t see the full impact at the time. You only see it a few months later. If we don’t take this seriously we are going to have a very unwell group in the population for years to come,” said O’Kane, who was formerly mental health lead for the NHS in west London.

With Boris Johnson, UK prime minister, setting out England’s gradual and cautious exit from lockdown earlier this week and the rollout of the country’s vaccination programme still going well, there are some causes for optimism.

But O’Kane and his peers worry about the long term toll the pandemic is taking on the nation’s mental health.

Owen O’Kane: ‘If we don’t take this seriously we are going to have a very unwell group in the population for years to come’

By the middle of 2020, one in five people in the UK was suffering from depression, twice the number in 2019, according to the most recent data released by the Office for National Statistics.

The Centre for Mental Health, an independent UK charity, has predicted that this will translate into up to 10m people needing new or additional mental health support as a direct consequence of the pandemic. But that may be a conservative estimate given that these figures predate the latest and deadliest wave of the virus as well as a winter of intensified lockdown.

“Why I am on my soap box at the moment is that I feel all of the energy is still on getting the R (the disease’s rate of reproduction) down when we have this other pandemic brewing,” O’Kane said.

Part of the answer, he and other specialists argued, will be in allocating sufficient resources to deal with rising demands on services. Another part, argues O’Kane, will be clinical.

“A pandemic is invisible. It’s not like bombs dropping,” he said. But cumulatively its effects are no less traumatic. “If you don’t address the underlying trauma [in patients], they will relapse,” he said.

The stress associated with home-schooling children while sustaining work, of indebtedness, loneliness, or of being forced to confront at close quarters relationships that are fatally cracked, alongside the continuous threat of the virus itself, for many people has taken a grim toll.

“When you have 120,000 families who have lost someone, many of whom have not been able to say farewell; hundreds of thousands of doctors and nurses who have struggled . . . why would you not expect there to be a large number of people with psychological problems?” said Alastair Campbell, the writer and former director of communications to Britain’s former prime minister Tony Blair. “It would be very weird if you didn’t.”

Campbell, who published a book last year on his own experience of severe depression, is frustrated at the lack of preparation for this crisis in the making.

“It’s not just that services are terrible in some parts of the country. It is also that the government is missing a massive opportunity,” he said, arguing that the shock of the pandemic has brought mental wellbeing to the forefront of everybody’s minds except, apparently, those in government. “They still think that if you talk about mental health it makes it worse,” he said.

The government has pledged £500m of extra spending on mental health services this year to address waiting times for specialists, which can stretch to months and more, and to invest in the workforce.

“As part of the long-term plan we have committed an additional £2.3bn a year,” said Nadine Dorries, the minister for health, suicide prevention and patient safety.

Dr Adrian James, president of the Royal College of Psychiatrists, said that it was vital this funding sustained increases in trained psychiatrists, and other specialists while addressing a hangover from years in which mental health has been treated as the poor cousin to its physical relative.

“There is a huge backlog of investment in the mental health estate,” he said, adding: “We need to be on the front foot around mental health in relation to Covid rather than reactive.”

That means taking into account what’s to come. While Johnson’s plan for lifting lockdown aims to remove all restrictions by the end of June, the end of economic support for workers and businesses will cause fresh anxiety.

“As some of the measures that have protected employment security and finances of those in unemployment come to an end, we are facing a cliff edge,” said Catherine Seymour from the Mental Health Foundation, the think-tank. It is calling for temporary £20 weekly increases in welfare payments to be made permanent in next week’s Budget and for a ban on evictions to be extended.

The Samaritans, often the last resort charity for people in distress, has been making similar pleas, pointing to the proven link between recession and increased suicides,

Jacqui Morrissey, the charity’s assistant director of research, said 1.7m people had called on the Samaritans for emotional support between March and December last year, a period, she said, when many people had been deprived of their usual coping mechanisms.

It was imperative, she said, that the voluntary sector, which provides an essential supporting role to the state when it comes to mental health, remains afloat. “We need to make sure that there is a fully funded mental health renewal plan as we come out of that pandemic and that this is at the top of priorities with government working in collaboration with the sector to deliver it,” she said.





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‘Their hair is on fire’: Trump fans await return to political stage

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On his final day in the White House last month, Donald Trump told a small crowd of supporters at Joint Base Andrews, the military airport, that he had no intention of leaving the stage quietly.

“I will always fight for you, I will be watching,” the outgoing president said before boarding Air Force One for the last time. “We will be back in some form . . . we will see you soon.”

Now the 45th US president is set to make a splashy return to the fray on Sunday with a keynote speech at the Conservative Political Action Conference (CPAC), an annual gathering of Republican politicians and media personalities that has become a kind of rock festival for rightwing activists, especially college students.

Ford O’Connell, a Trump supporter and former Republican congressional candidate, said attendees were “dying” to hear from Trump, whom he described as the “leader of the Republican party, even if he is not in office in the traditional sense”.

“These folks are unhappy about how the 2020 elections turned out, but their hair is on fire after a month-and-a-half of the Biden administration,” O’Connell said.

“What they want to hear from Trump is: how do you move forward in 2022 and 2024,” he added, referring to the midterm elections in two years and the next presidential contest.

Trump’s speech will end an unprecedented stretch of near silence for the former reality TV star, who built his political career on regular cable television appearances and constant tweeting. After leaving Washington, he took off for Mar-a-Lago, his resort in Palm Beach, Florida, and has stayed there since, playing golf and shunning the spotlight.

Shorn of his ability to communicate with to his millions of supporters on Twitter and Facebook — which banned him for his role in the deadly January 6 siege on the US Capitol — Trump has made just two notable interventions: he called in to Fox News to eulogise the late rightwing radio host Rush Limbaugh, and released a blistering statement attacking Mitch McConnell, the top Republican in the Senate.

Advisers had encouraged Trump to keep a low profile during his impeachment trial, which ended this month with his acquittal.

Trump will be the final speaker at the four-day conference, which is being held in Orlando, Florida — a city that is just two-and-a-half hours drive from his home and that has looser Covid-19 restrictions than CPAC’s usual location of Washington, DC. The former president is expected to speak in person, although event organisers have not confirmed the details of his speech.

Ted Cruz, Republican Senator from Texas © Getty Images
Ron DeSantis, Governor of Florida © AP

The list of the other CPAC speakers reads like a who’s who of his fiercest defenders, including Florida’s governor, Ron DeSantis, and Republican senators Josh Hawley and Ted Cruz — all of whom have been suggested as possible 2024 contenders that could carry Trump’s torch if he does not run again for president.

Trump has not ruled out another bid for the White House, despite mounting legal troubles, including criminal investigations in New York and Georgia.

His appearance at CPAC — an event dating back to a speech by Ronald Reagan in 1974 that has become increasing populist and Trump-centric in recent years — has also drawn attention to Republican party infighting.

Mike Pence, the former vice-president, who fell out of favour with Trump supporters after he certified Biden’s election win, is not attending the event. Nor is Nikki Haley, the former South Carolina governor who told Politico in an interview that ran earlier this month that Trump could not run for office again because “he’s fallen so far”.

The party’s divisions were laid bare in an awkward encounter on Capitol Hill this week, when reporters asked House Republican leader Kevin McCarthy whether Trump should be speaking at CPAC.

McCarthy replied, “Yes, he should,” before Liz Cheney, one of his deputies, interjected: “I’ve been clear in my views about President Trump . . . following January 6, I don’t believe he should be playing a role in the future of the party or the country.”

After Cheney contradicted him, McCarthy abruptly ended the press conference, saying: “On that high note, thank you very much.”

Cheney was one of 10 House Republicans who joined all House Democrats in voting to impeach Trump last month, and is among a handful of critics on Capitol Hill who have openly castigated the former president despite knowing they run the risk of losing the support of party voters.

While a few elected Republicans, like McConnell, have joined Cheney in rebuking the former president, CPAC will serve as a stark reminder of how popular he remains among party activists.

A Suffolk University poll out this week found 46 per cent of people who voted for Trump last November said they would abandon the GOP if the former president broke away and formed his party. Half of those polled said the Republican party should be “more loyal to Trump”, compared to one in five said the party should be less loyal.

Matt Schlapp, a Trump ally and chairman of the American Conservative Union, the group that organises CPAC, told Fox News this week the Republican establishment should recognise that it must now cater to a much broader church; one made up by the old party faithful and the supporters that Trump brought into the fold with his “Make America Great Again” movement.

“It’s Republicans, it’s conservatives — who are this big, big minority in this country — and then it is these new MAGA supporters,” Schlapp said. “This is now a coalition.”

But more moderate Republicans warn that by sticking with Trump, the party will never be able to win back the centrist conservative and independent voters who abandoned the party at the ballot box in November.

“It is important to remember there is a whole other wing of the party, and virtually no one from that . . . wing is being represented at CPAC,” said Whit Ayres, a veteran GOP pollster. “It is a gathering of the most conservative and some of the most active members of the Republican party, but it represents only a portion of the party.”



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