With one year to go until the UK officially bids ‘adieu’ to the EU, the countdown to Brexit day is in full swing. Even if it feels like no progress has been made so far, a lot can happen in a year. Here we take a look at the main Brexit milestones and how it has impacted your investments.
Led by David Davis, a team of UK officials go to Brussels to negotiate with the EU around once a month. His counterpart is former French foreign minister and EU commissioner Michel Barnier.
After the UK officially leaves the EU at 11pm on 29 March 2019, the UK will enter a 21-month transitional period to avoid a proverbial cliff-edge exit.
This week’s transitional agreement was crucial for businesses, who have been left hanging in the balance, and sterling climbed to its highest value in weeks on the back of it. Unfortunately, during this time, the UK will need to abide by EU rules but will have no say in the decision-making process.
Uncertainty is difficult for markets to price in and can put the brakes on business investments, denting consumer confidence, which in turn can weigh on economic growth.
When do Brexit negotiations end?
The negotiating phase must be wrapped in the autumn, but with only the transitional phase agreed on, there’s still a lot to do to get closer to understanding what a final deal will look like.
Once finalised, the withdrawal bill will need to be signed off by 72% of the member EU states and be voted through parliament.
That still seems a way off. Although nearly three-quarters of the 120-page working draft have been agreed, including the €45 billion financial settlement, citizens’ rights and now the transition period, the remaining gray areas are complex.
Northern Ireland’s border issue has turned into one of Brexit’s most controversial issues, and it holds the potential to reignite historic tensions. The crucial point is whether it will be just the region or the whole of the UK in a customs union with the EU after Brexit.
Whilst the withdrawal bill will be crucial to avoid Brexit day chaos, it will be the framework for the future post-Brexit relationship between the UK and EU that’s instrumental in getting the bill over the line in parliament. Any decisions made outside the withdrawal bill will be non-binding, but talks on the framework will start in the coming weeks.
Whilst Theresa May will want to use this to outline her vision of a bright future, some EU member states will want to show that there are consequences to leaving the bloc.
If agreements aren’t made before the end of the transitional period, the UK will find itself in a more difficult position. Something Davis is very aware of, and he’s pushing for a detailed plan on future partnerships before the UK leaves.
How has Brexit impacted the economy?
The UK hasn’t reacted to Brexit in the way doomsayers had predicted, although the impact on business sentiment and consumer confidence is starting to feed into economic numbers.
The UK economy beat forecasts of 1.5% growth in 2017, expanding by 1.7% instead. The Office for Budget Responsibility upped its 2018 outlook from 1.4% to 1.5%. After that, growth forecasts have been left unchanged, pencilled in at 1.3% for 2019/20 and 2020/21, and then picking up to 1.4% in 2021/22 and 1.5% in 2022/23.
This probably isn’t the picture of health Chancellor Philip Hammond might have wanted to show-off. Forecasts for more subdued medium-term growth leave the UK economy looking around 3% smaller in 2020/21 than was forecast two years ago, numbers from the Institute for Fiscal Studies show.
Economic growth already lags behind other G7 members and there are relatively few avenues remaining to generate further revenue. Slower GDP growth could stall investment in business and public services and dent consumer confidence, which could weigh on financial markets.
How have financial markets reacted?
Financial markets have finally woken up from an abnormally long period of low volatility. Having absorbed potential shocks and jitters to extend the second longest bull run on record, it was stronger-than-expected economic numbers in the US that was the final straw.
Investors have short memories, and the return of volatility has been a shock for many, even if it is largely driven by the geopolitical tensions and US politics. Remember, it’s a crucial dynamic of the markets that allows you to spot value opportunities.
Markets don’t like uncertainty, and unfortunately that’s all there really is in the UK at the moment. Businesses are unlikely to invest against an uncertain backdrop and consumers traditionally don’t like to spend.
The momentum behind inflation has been stunted slightly following the Bank of England’s base rate hike late last year. The rate of price growth in the UK is still well-above the 2% target however, and monetary policy is expected to tighten at a faster and more aggressive rate than initially expected.
With economic growth fuelled largely by consumers dipping into their savings, interest rate hikes could have a negative impact on economic growth, which isn’t very appealing for UK equities – especially with many active fund managers already underweight the UK.
It’s scenarios like this that highlight the advantages of a geographically diversified portfolio. By carefully spreading your money across regions, you can manage the risk in your portfolio.
A well-diversified portfolio that’s built to reflect your investor profile and time horizon would aim to offset any losses with gains made elsewhere.
If you live and work in the UK, you already have a large exposure to the UK economy and might not need to allocate a large part of your portfolio assets there as well.
Once the withdrawal bill and framework for the post-Brexit relationship are ironed out, some certainty should return to the markets, which will feed through into business plans and consumer sentiment.
Sterling has already strengthened on the back of a clearer outlook, with the the GBP trade weighted (an average of the movement of the pound against other developed countries up 2.1% year to date.
There are many strategies you can pour over to try and maximise your returns, but one of the most important things you need is time. A long-term time horizon allows you to ride out any short-term fluctuations and take more risk with your money, which means you can expect higher returns – although the further your money can also fall in value.
