INVESTMENT LINE: BREXIT SPECIAL - 1 DECEMBER 2020

A Canada deal, an Australia deal or an Afghan deal? We will soon know which it is to be. We thought it might be worth a quick update, to look at how such a deal might affect investors based in the UK. First things first: we won’t be positing which deal we should be doing, or which one is “best” here. The long-term impact of the various permutations of any deal are very hard to predict. HM Treasury economists have estimated hits to GDP over the next 15 years of between 5% and 8%, depending on whether a ‘hard Brexit’ deal is struck, or if there is no deal. But the truth is that economic forecasting is notoriously difficult.

The only certainty at present is that the UK will (almost certainly) be leaving the EU’s customs union and single market on 31 December 2020. However, while long-term economic forecasts are perhaps best avoided (or at least left to professional economists), we can anticipate certain trends on financial markets if we see a deal emerge. Importantly, what are markets telling us right now? Both UK equities and the foreign exchange markets seem to be pricing in a very high likelihood of some sort of deal being agreed, probably at the EU Council of Ministers 10/11 December 2020. Why the optimism?

There is immense pressure on the UK government to do a deal, given that our economy is one of the worst hit by the pandemic. There is little appetite amongst UK voters for no deal, and President-elect Biden has made it clear that any trade deal with the US is conditional on a deal between the UK and the EU. For such a deal to happen, agreement is needed on access for EU fishermen in UK waters, ‘level playing field’ conditions (of which state aid is the key sticking point), and the role of the European Court of Justice in policing any agreement. To achieve a comprehensive trade deal, with no quotas or tariffs, face saving terminology will probably be found to protect the blushes of Monsieur Macron (who rashly promised French fishermen that Brexit won’t affect them), and for Boris Johnson (whose government’s controversial Internal Market Bill has re-opened the debate over the Irish border). If the PM can clinch a comprehensive no tariffs, no quotas trade deal investors in UK stocks may well breathe a sigh of relief.

We can expect to see a modest addition to the Santa Rally for UK equities (that seems to have begun early this year (tune in to our Investment Webinar on 10 December for more of that)). We can also expect to see some strength in Sterling, the latter perhaps heading towards $1.37 (at the time of writing, we have c. $1.33). The risks, therefore, are almost all on the downside. What might they be?

Aside from potential chaos at British ports, we may well see a reduction in spending in the economy as investment decisions are put on hold and as households reign in consumer spending to build up savings. Some sectors (that have avoided the worst of the pandemic) will be at the forefront: agriculture, fishing, autos and other manufactured goods.

Therefore, for many reasons, the hot money is on a comprehensive no tariff, no quota deal being struck for traded goods. This seems to us to be the most likely (but not certain) scenario. Investment is about minimising risk and we recommend maintaining a diversified portfolio with multi-currency and multi-country exposure.

Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.

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