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The Brexit Countdown

Sanlam

Mark Ward, Head of Trading at Sanlam UK

“The United Kingdom is now just one year away from leaving the European Union, so what can we expect to happen on March 29th 2019, and what effect have negotiations had on the markets so far?

Equities

As a large part of the FTSE 100 (the largest UK-listed companies by market capitalisation) are overseas corporations with non-Pound Sterling earnings, the weakness in the British Pound has actually proved relatively beneficial for financial markets, with the FTSE around 1200 points (20%) higher now than back in June 2016, and the UK has broadly outperformed continental European markets. Of course, the surging US indexes and general improvement in the global economy has helped, but it seems that the initial Brexit jitters have not significantly impacted UK equities.

The FTSE 250 is the next group of large British companies, and is generally composed of domestic UK firms. This bourse is up 5000 points (35%) since the day of the vote to leave. The FTSE 250 has outperformed the FTSE 100, because the pound has recovered somewhat since the referendum, and this has a less negative effect on the FTSE 250 than the FTSE 100. Both indexes have benefitted from an improvement in global sentiment, but the FTSE 100 performance hasn’t been as stellar due to the pound seeing a significant bounce, particularly against the dollar. 

Government Bonds

UK bond yields have generally been outperforming those of the US and Euro-area, and although this is in part because of a general continuing trend of global sovereign debt selling, there are concerns that the Bank of England may be considering another interest rate hike sooner rather than later, and worries over the UK’s ability to prosper outside of the EU. Central banks are slowly reigning in quantitative easing after nearly a decade of cheap cash being pumped into the markets to provide stimulus, and with the Bank of England following suit, UK Gilts may remain under pressure. The UK economy is performing better than many forecast, but investors are still demanding a premium for the additional risk. 

Currency and House Prices

The British Pound slumped nearly 20% against the US Dollar and the Euro in the weeks after the vote, although it has since rallied, particularly in relation to the US Dollar, where it is now only 4% lower. This has provided the UK with a welcome tourism boost, albeit at the expense of the British holidaymaker looking to travel overseas, and the eventual Brexit bill payable to Brussels in Euros.

House prices around the UK have seen a general slowdown in the past year, particularly on the higher end of the London premium market. Although a lower pound should create a buoyant market for overseas buyers, the uncertainty over Brexit and future interest rates (with at least one, and probably two hikes expected this year) and stamp duty decisions has led to a stagnation. Less housing stock available, particularly at the lower and mid-range of the market, means less choice for homeowners to move up the ladder, so has created a quieter market with a “wait and see” attitude, and a general lack of investor appetite has seen a slashing of asking prices at higher end of the market. Some areas in the UK are recording growth, but at much subdued levels. On the flip side, inflation is running relatively high in the UK, so anyone with a fixed rate mortgage benefits, as the holder is essentially paying back the bank with inflation-devalued pounds. 

Political Ramifications 

Political risk will remain high, especially as the divide between those wishing to Leave or Remain has stayed stubbornly at around about 50:50 since the vote, placing the current Conservative government in a tricky negotiating position. Public views after an initially close referendum often begin to converge with time, but it has not happened in this case.

A surging popularity of Jeremy Corbyn since shifting Labour from the middle to more towards the left is constantly placing Labour ahead of Conservatives in opinion polls, and any sudden unexpected general election could well see Labour in power. This would mean extreme volatility in the currency and government bond markets, but would also potentially lead to a softer Brexit stance, limiting equity market fallout. 

Looking Forward 

The UK and EU is now over a year into negotiations as to how the future relationship will look, and despite media dramatisation and political point-scoring from sniping politicians, a fair amount of progress has been made thus far. The financial settlement of UK obligations and the rights of UK and EU Citizens have been agreed, and there are now proposals for the issue of the Republic of Ireland and Northern Irish borders. A hard Brexit is looking unlikely, and an arrangement styled on the Canadian free-trade agreement will possibly be used. There is also to be a two-year transition period after 2019, so as to further mitigate the risk of a hard Brexit.

Despite public and political opinion still being split as whether being a ‘Remainer’ or a ‘Leaver’, there is generally less appetite for another referendum from both sides, so the outcomes for March 2019 is not if the UK will leave, but how hard or soft the exit will be. Other than those with an extreme interest in a hard exit, such as North Sea fishing fleets, the general consensus seems to be towards reaching an agreement so there are tariff-free procedures in place for companies.

Sanlam has entities and extensive experience in both the UK and Europe, so however hard or soft Brexit ends up, we will ensure a seamless experience for our clients investing in our funds and holding accounts with us.”

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