Opportunities in a post-Brexit world
Brexit – what happens next? We look at new opportunities – and risks – for investors.
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Today marks the end-point of a process that began on 24 June 2016. The subsequent three-and-a-half years of often-fraught negotiation – both with the EU and within the UK – come to an end at 11pm tonight when the UK officially leaves the EU.
As such, today’s date is symbolically important, turning the page on an eventful chapter of the UK’s constitutional history. The key to understanding what happens next lies in understanding the knowns and unknowns of our current situation.
What we know
The UK is now emphatically and unambiguously leaving the EU. Any uncertainty over whether Brexit would come to pass has been laid to rest.
Added certainty is a good thing. And there’s some indication that it’s already making a difference.
The UK Purchasing Managers Index (PMI) released on 24 January, rose to 52.4, from 49.3 in December. The PMI surveys businesses about business activity – numbers above 50 indicate they expect activity to increase, while anything below 50 means they expect it to fall. The January figure is the highest in 16 months, indicating a sharp pick-up in expectations.
Early indications on residential property data also suggest that buying activity increased at the end of 2019, reflecting rising confidence.
All of this is confirmation that the increased certainty over the UK’s direction is having a positive effect.
And this could be positive for investors, too. UK equities have been unpopular for a while, particularly shares in companies that are very exposed to the UK economy, largely due to the uncertainty surrounding Brexit.
We invested in these types of companies in 2019, when many other investors were avoiding them. Fears of a no-deal Brexit were at their peak and many commentators expected the UK to dip into recession. But recession never eventuated, the possibility of a disorderly Brexit evaporated, and these companies increased in value.
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What we don’t know
While today sees the end of an important chapter for the UK’s relationship with the EU, it is not the end of the story.
In the near term, the trade negotiations with the EU are an important factor to keep the momentum of the nascent post-election growth recovery.
The nature of the UK’s trading relationships – with the EU and the wider world – will be crucial. A degree of drag on what has previously been friction-free trade seems inevitable. A major factor will be alignment with EU standards and regulations, but these could also have an impact on the UK’s ability to strike deals with other markets. Ultimately, much depends on whether negotiators can keep the wheels of commerce as well-greased as possible.
In the longer term, improving productivity and the rising importance of fiscal policy will also be important factors. The upcoming budget on 11 March will give us a taste of the direction of policy in the latter area. What this means for the UK economy will also only become clear as negotiations continue. While the final impact will no doubt fall somewhere between the most dire and most optimistic estimates, it is likely to be unevenly distributed in terms of sectors and business types.
Looking to the future
There are early signs of a post-election recovery in UK growth. The consumer is in good health, while wage growth and house price trends look positive. Low rates and fiscal stimulus should be supportive of economic growth as well.
The Bank of England opted to leave rates unchanged at its meeting on Thursday, indicating that they are waiting for a clearer view on the direction of growth before making any changes. While the growth forecast for 2020 was reduced – to 0.8% from the previous forecast of 1.2% - any cut in rates depend on future economic strength and any fiscal measures mentioned in the March budget.
As we’ve frequently repeated throughout the Brexit charivari, the UK is only one factor we consider when we make investment decisions, and a relatively minor one at that. The global economy sets the dial on our investment strategies, in particular the lodestones of the US and – increasingly – China.
We’ll continue to monitor activity as the negotiations continue. Political disruptions can often throw-up short-term opportunities, as we have seen already, which we remain alive to. And the UK’s changing relationship with Europe will undoubtedly have an economic impact that we’ll need to assess.
Facing the future with an eye for opportunities – and risks – will remain at the heart of what we do to preserve and grow our clients’ wealth.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment.