Short-term noise v long-term implications
Issues such as the terms of the UK’s divorce from the European Union (EU) have garnered much media coverage. The divorce bill is the net cost of financial commitments that the UK made as a member of the EU when the most recent five-year budget to the end of 2020 was established. It includes support for agriculture, fisheries, infrastructure, refugee support and measures to reduce uncontrolled immigration from Africa.
By agreeing to a more generous divorce bill, Mrs. May is affording herself greater leverage on the remaining sticking points of negotiation encompassed within free trade, movement of labour and the Irish land border.
In five years’ time, these issues are likely to have been absorbed by market forces. Of greater concern are the implications for economic growth.
From a global perspective, many investors in Asia and the US haven’t fully taken on board that Brexit will actually happen. If the UK’s post Brexit situation is significantly worse, international investors might have to re-evaluate the risk levels in their portfolios. This could lead to investors selling equities in order to manage their risk levels, sending some stock prices down.
Closer to home, we have to consider the veracity of the leaked government risk assessment analysis suggesting that the UK economy would suffer from any kind of Brexit. The scenario of reverting to World Trade Organisation rules i.e. a “hard” Brexit, was mooted as leading to UK growth being 15% lower in 15 years’ time compared to current forecasts(1). However, in a widely reported response, a government spokesman described the analysis as depending on a large number of caveats and assumptions.
Unfortunately, it is still impossible to say what the outcome will be. We are prepared for ongoing uncertainty as the negotiations progress and would echo Bank of England Governor Mark Carney’s sentiment that business investment is likely to recover somewhat once the new relationship becomes clear (2).
(1) Source: Buzzfeed.com. “This leaked Government Brexit Analysis Says The UK Will Be Worse Off In Every Scenario. 29 January 2018.
(2) “UK business is looking for certainty. Once they [get] greater certainty they will look to put [Balance Sheet] money to work”. Testimony to the House of Lords’ Economic Affairs Committee on 30 January 2018.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at April 2018. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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