The UK had finally reached a breakthrough in the Brexit negotiations. After a long stretch of global uncertainty, I felt unusually optimistic as I ate my cereal and simultaneously tried to feed my children bleary-eyed on Friday morning – but it’s important to remember the hard work is only just beginning.
After burning the midnight oil with the DUP, Prime Minister Theresa May flew to Brussels in the early hours of Friday to present a 15-page progress report to European Commission President Jean-Claude Juncker.
Covering EU citizens’ rights, the divorce bill and the finer details of Ireland, the report was clearly enough to get the EU on board ahead of an important summit next week.
The Brexit divorce bill is now estimated to be between £35-39 billion (€40-€45 billion), which covers outstanding budget commitments, EU officials’ pensions, contingent liabilities and extra costs associated with the withdrawal.
Essentially, the UK will pay into the EU budget for 2019 and 2020, just as if it had remained in the union. The UK will also pay for any liabilities incurred up to 2020, but are due to be paid in the years – potentially decades – to come.
This is good news for both; no EU member states will need to increase their payments as a result of Brexit, but the figure is also lower than numbers initially floated by experts of over €60 billion.
This breakthrough follows an intense week of negotiations. The first phase of talks fell apart earlier this week as the DUP threw the original plans out of the window. Running out of negotiating time on Thursday night, some of the finer details around implementing Ireland’s exit of the EU still need to be ironed out.
But, if trade talks fail and result in a Hard Brexit, there’ll be no hard border between Northern Ireland and Republic of Ireland. There will also be no red line drawn in the Irish Sea between Northern Ireland and the rest of the UK.
The deal ensures that EU citizens can claim residency through a transparent and smooth process, and also protects the rights of British citizens living abroad. The European Court of Justice will still have a role in overseeing some EU citizens’ rights, although only in a small number of cases.
‘Brexit’ up is hard to do
Still, the hard work is still to come as negotiators turn to the second phase of talks; trade. And as European Council President Donald Tusk mused on Friday: “Breaking up is hard, but breaking up and building a new relationship is even harder.”
Although this is the political breakthrough Theresa May has been waiting for, it won’t stop companies from scoping out their Brexit contingency plans. Britain’s finance industry is close to the point of no return, UK Finance has warned.
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At least the UK now has the green light to enter this second phase of negotiations, as it will be the trade talks that will be crucial for confidence.
May won’t have much time to celebrate her victory, however. Trade talks between the EU and Canada took seven years – a luxury the UK doesn’t have.
As one door closes, another door to even more uncertainty opens – especially as the subject turns to trade.
Markets happy with uncertainty
Although this political climate of uncertainty is set to continue, we’ve been hard pressed to see any kick-back on the financial markets over the last year or so. Historically low levels of volatility are continuing their long reign over the markets, underpinning the equity bull market.
Markets have certainly performed better than most had expected this year, with the world economy beating most forecasts for the first time since 2010 and relatively low levels of inflation supporting a slower return to normal monetary policy.
This economic backdrop is fuelling low levels of volatility as investors believe – rightly or wrongly – that Central Banks will be there to step in if things get tricky.
For the momentum on equity markets to continue into 2018, this backdrop is going to have to continue in a similar vein. If Central Banks step aside and relinquish some of their power, investors could find the wave they have been surfing starts to break.
How should you invest during Brexit uncertainty?
If it does, should the way you invest change? No, is the short answer – even if it does go against instinct. Continuing to invest a little and often can help smooth out the amount you pay for an asset over time, which can maximise your returns if your investments recover later on.
Imagine you have £20,000 to invest – the equivalent of your annual ISA allowance. If you invested it all at once, you’re exposed to any short-term fluctuations in an asset’s price. If the market starts to fall after your purchase, you’ll have paid more than you could have had you waited.
If you invest a little and often, you can lower the average amount you pay for your asset in a falling market. Although the opposite is true in a rising market.
When you’re investing for the long-term, short-term fluctuations over uncertainty don’t matter as much – but pound cost averaging can maximise your returns and ease any nerves – letting you focus on what’s important in life.