The Brexit deal is not satisfactory for either side of the political debate within the UK. There is still uncertainty, especially when it comes to the future trade relationship with the EU.
Headlines
- During the transition period, status quo is maintained.
- Brexit deal is not seen favourably for either side of the political debate in Britain. There are long-term political implications of the deal and Brexit.
- Economic effect of Brexit has already been negative and that’s given the UK hasn’t left yet. There is still uncertainty that affects the stalling market.
Key themes
The timing of the discussion was spot on – this was a day of ministers resigning. Just before Lord Adonis spoke at the morning session, news came that Dominic Raab resigned. Throughout the day more and more news was emerging about resignations off the back of the deal Theresa May put forward with the EU.
The session revolved around the Brexit deal, the possible effect on Sterling and other investment implications, longer-term political implications, the possibility of the UK going into recession and another referendum.
The deal that was put forward was assessed as being a good deal for EU, not so much for UK. In essence, Britain will leave, but will still continue to contribute as if it were a member until the end of the transition period which is expected to be at the end of 2020. There is a possibility of the transition period being extended, but for participants of the session, the implication is that this will essentially extend the uncertainty.
“Things didn’t get closer to resolving since Brexit, do you think 2-year extension will increase the quality of negotiating skills?”
“The only country that ever left was Greenland in 1980s. It took them 6 years and they weren’t as integrated as UK. Whoever came up with the idea of 2 years was smoking dope.”
While in transition, the implications for the UK are that ECJ will be the ultimate ruler, common fisheries will be in place, the UK will keep paying the EU and the transition period is extendable indefinitely. The question remains as to what the future trade relationship is going to look like once the transition period is over. The UK still needs to negotiate final trade deal with the EU. The UK can negotiate trade deals with other non-EU countries, but cannot implement them until end of 2020.
“One thing to remember for hard Brexiteers – if we do less trade, both sides suffer, but UK will suffer harder, while EU’s impact will be diluted across countries within it.”
It was evident that in terms of negotiating strength the UK was missing out. The EU’s position has been clear from the beginning and could be summed up as “The UK cannot be in a better position by leaving EU”.
Because the deal is not delivering what Brexiteers wanted (UK gives up sovereignty) and Remainers will be unhappy because the deal implies the UK will be in the same position with the EU as before but worse, the future of the deal is unclear. The next step is to get the deal through to Parliament. Before that, there might be a challenge to May’s leadership. However, she may still be preferable to a Remainer from the point of view of her party. Thus, lack of leadership alternatives may just get her through.
“May’s been incredibly resilient politically. If May resigns or enough requisition letters are collected, still not sure that’s easily resolved, too many egos.”
The Conservative party is perceived to be split internally, but so is the Labour party. Labour MPs want to stay in the EU but the followers want to exit. If Labour was united, the Conservatives would have been challenged by now.
“Fundamental division over EU is an opportunity for a new political force to appear.”
One of the implications of the deal is that it increases the probability of a referendum. In that case, the question is – what question should be asked. Additionally, the deal is perceived as increasing the probability of election.
“Conservatives will reap what they sow, younger generation will retaliate”
However, participants were not sure the referendum and/or election was a good idea. As the saying commonly attributed to Churchill goes, “The best argument against democracy is a five-minute conversation with the average voter.” Participants in the room agreed putting this to a referendum might not solve a problem.
In terms of economic implications, Brexit has been unfavourable for investment so far. It’s been two years since the vote, and the growth of the UK is at 1.6% while EU’s is at 2.3%. This is in stark contrast to 2.1% growth rate for both the UK and the EU two years before Brexit. Additionally, the pound fell in value, and investment spending is getting more stagnant. Brexit uncertainty is dampening investment spending and household savings are decreasing too. Despite the pound’s depreciation the UK share of world exports diminished.
Regarding UK equities, returns in local currency terms are up 11% but compared to other currency equities (USD and EUR), in common currency, UK equities have underperformed. Considering the possibility of recession is what stops fund managers going overweight on equities. The only asset class that was deemed to have had acceptable performance as result of Brexit was Gilts.
When it comes to planning ahead, participants were in agreement that the variables may be too hard to comprehend for 2-3 years to make it into an investment strategy. Outsiders looking into the UK don’t need to invest into the UK especially when there are alternatives such as investing in Asia instead. The UK is perceived to be too complex and investors would choose to wait it out.
The conclusion was clear:
“Markets and the economy doesn’t like Brexit”
Among the many questions that Brexit is posing for wealth management sector, Ireland is one. The main issue is to get licences there. This requires a substantial presence, which means senior leadership presence, and the market for it is too expensive in Dublin so far. The only jurisdiction that’s friendly is Luxembourg, but it’s getting harder there too.
What businesses do about Brexit depends on business model, the split between domestic UK clients and international. Clients are generally looking for confidence from firms that they anticipated challenges and are on top of the game. Moreover, For UK domestic clients, possibility of Corbyn government is more on the books than Brexit, they ask questions about it, so for UK firms with domestic clients, it’s business as usual.
“Common statement from clients: “I hope you’re not investing in the UK because I am in the UK”.
Conclusions
- One of the main implications of the Brexit deal is that there is still a lot of uncertainty. Lack of clarity on a future trade deal with the EU, lack of clarity on the end of transition – these factors affect confidence of investors.
- Markets have not reacted well to Brexit so far, with Sterling taking a hit, as well as equities. The investment is decreasing, and so is spending. There is a concern that the UK is going to go into recession.
- However, for the domestic UK clients, Brexit is less of a concern than the possibility of Corbyn government.
Expert: Paul Jackson, Invesco
