brexit

Are we heading for a no-deal Brexit?

01 Oct 2018

Haig Bathgate, Head of Portfolio Management

With the clock ticking towards the deadline of 29 March 2019, the number of headlines and the level of rhetoric about Brexit have spiked. That’s unsurprising given much still needs to be agreed, but what should investors focus on?

Saturday 29 September 2018 represented the three quarter mark of the UK’s two year transition period for exiting the EU. Although there have been signs of progress – a €39bn divorce bill has been agreed – there remains significant uncertainty with just six months left until the deadline. Most importantly, there is little clarity on what the future EU-UK relationship will look like, particularly in terms of trade. The government is divided on the issue, which doesn’t do much to inspire confidence.

From an economic standpoint, frictionless trade is clearly a desirable outcome for both the EU and UK. Snaking lines of stationary trucks at the border in Calais, or in Northern Ireland, aren’t going to be good for business, but there are additional considerations at play.

Politically, self-interest abounds. From the EU’s perspective, there are clearly concerns that a UK-friendly deal sets a blueprint for other members to follow suit and start to plan their own exits. The UK, meanwhile, has proposed just that, with proposals for free movement of goods, flexibility regarding services and reduced immigration. This is ‘cherry picking’ in the eyes of the EU. Alternative proposals for a Canada-style deal appear designed to further the leadership case of Tory rebels as much as provide a pragmatic solution.

Recently, I was on a panel debating the potential outcomes, hosted by The Spectator. The discussion was led by broadcaster and journalist, Andrew Neil. Joining me on the panel was James Forsyth (Political Editor at The Spectator), Anna Soubry (the Conservative Member of Parliament for Broxtowe in Nottinghamshire) and Matthew Goodwin (the Professor of Politics at the University of Kent).

The debate was mainly a political one with diverging views on what was happening and why. It was clear that a number of potential outcomes remain on the table: from an agreement as early as November; to a last minute deal; or even a no-deal situation.

This range of possibilities means that the implications for investors and markets remain as diverse as ever. However, there are wider points worth noting:

  1. At present, the market continues to assume that an agreement will be reached. Accordingly, the impact of a no deal could be severe, at least in the short-medium term. The FTSE 100 derives less than a quarter of its earnings from Europe and the corresponding effect of weaker value of Sterling will provide a boost. However, until a new trade regime is established, corporates are likely to suffer.

  2. In the meantime, the UK economy remains broadly on its growth track, primarily because nothing has changed. While Brexit negotiations are important, there are other factors that investors should be looking at that could lead to an economic downturn or help sustain growth. Mark Carney’s decision to continue his term as Bank of England governor provides continuity for monetary policy.

  3. It’s important that investors do not become too focused on the UK news stream only. There is a lot going on in the rest of the world too. We can see that just in Europe. As Macron’s approval ratings are very low and Merkel has had notable set-backs, the blueprint for further European integration has been postponed. It won’t progress next year either as 2019 will see EU elections take place, and elections are scheduled for lots of member countries too. Italy is also still on a lot of EU agendas for a variety of reasons.

As such for investors, and 7IM portfolios, the story therefore is pretty much the same as before. Our global economic outlook has not changed significantly over the last six months. The global economy remains healthy, with both the US and Europe continuing to grow, while China is due to launch more economic stimulus. The main source of uncertainty for the portfolios comes from the UK.

It means our portfolios continue to be as broadly diversified as possible and positioned to benefit from growth where that exists. For the UK, we are focusing on insulating the portfolios from any sharp moves in the value of Sterling.

In the absence of a crystal ball, the scenario planning we have done means that we are confident that we are able to react whatever happens. So we need to continue to wait, but watch this space!

 

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