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The Brexit Saga Continues

After voting to leave the EU back in June 2016, Brexit is finally set to go ahead at the end of January. In the wake of this, demand for the British Pound should increase as the details of Brexit are understood.

– Lachlan Mackay

 

After voting to leave the EU back in June 2016, Brexit is finally set to go ahead at the end of January. Boris Johnson’s Conservative Party won the UK general election as main opposition Labour collapsed in key seats to finish with their lowest number of MPs in 84 years. Indeed, the Conservatives have not held such a majority since Margaret Thatcher led the party in 1987, giving them clear working majority to deliver Brexit as promised. The elected MPs then voted significantly in favour of Johnson’s EU Withdrawal Agreement Bill, which has been passed on to the European Parliament for further examination.

Johnson has taken leadership with a simple, clear slogan: “Get Brexit Done.” In a country drowning in Brexit-fatigue, this proved to be an effective way forward. Parliament is expected to pass the Bill, pushing the UK into a transition period until December 31, whereby they are no longer part of the EU but are still subject to their existing trading laws while new deals are negotiated. In principal Johnson has rejected the idea of extending this transition past 2020, which many believe is unrealistic and could leave Britain separated from the EU without a deal in place. In his effort to alleviate all uncertainty he may have created even more.

The UK does about half its trade with the EU, making that trade deal the first step in the post-January 31 Brexit negotiations. However, history suggests that despite spending 3.5 years getting to Brexit, the toughest period may in fact begin the day the UK withdraws itself. Despite obvious differences, it is worth noting that Henry VIII broke England from the Catholic European Union of the sixteenth century (which was referenced in the lead up to the Treaty of Rome that formed the modern EU). This led to hundreds of years of war and political uncertainty, whereby English rulers faced an ongoing and impossible struggle between appeasing hardcore exiteers by waging anti-Catholic wars they could not afford, and placating the European Union but pushing exiteers toward a civil war amid protests.

The situation today is not so dissimilar. Only 52% of the UK voted to exit the EU, and much of the opposing remainder will still take any initiative to avoid leaving. Although far less inclined to start war than in the medieval period, we are living in a time of global political unrest, marred by violent protests and growing international tensions. The EU has most of the bargaining power, and while I think there is only a small chance they play hardball with the UK to the point of political unrest, it is certainly believable that they will take a strong enough stance such that negotiations are difficult and drawn out, pushing back the rest of the Brexit transition process.

Aside from negotiating trade, many other aspects of the UK-EU relationship will need to be agreed upon: law enforcement, data sharing and security, aviation standards, medicine regulations, access to surrounding waters and supply of gas and electricity (to name a few). Fundamentally, new immigration systems will need to be developed and approved by both parties.

Ultimately for businesses, the initial period of real uncertainty is over – we can be almost certain Brexit will go ahead. For close to four years, investment decisions have been put off amid the extended uncertainty. Businesses have been stockpiling inventory as a precaution to avoid tariffs in the no deal Brexit case. The government will begin to stoke the economy back into (ideally) steady growth through fiscal expenditure, meanwhile interest rates remain low to encourage spending. Although longer-term Brexit uncertainty persists as the UK begins to discuss trading relationships, the risk of a no deal Brexit all but disappearing on January 31 will give businesses some immediate clarity.

Morgan Stanley expects the global economy to recover momentum in 2020 with growth improving to 3.4% by the end of 2020. Pent-up British savings already injected £1 billion into UK-focused equity funds in December, making up the majority of 2019’s total £1.5 billion in net flows, according to Calastone. This forms the highest level of flows into UK equity funds in five years. Moreover, demand for the British Pound should increase as the details of Brexit are understood. Hence, coupled with an accelerating global economy, we may see strong performances from high quality UK businesses in 2020 that have suffered through years of uncertainty and sluggish investment.

 

 

 

 

 

 

Lachlan Mackay is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.