Get Brexit done!

What happened?

During yet another seismic night in British politics, the conservatives under Prime Minister Johnson emerged as clear winners. The previously tabled withdrawal agreement will surely now pass before the January 31st deadline. Much of the medium term outlook for the UK economy now hinges on the ability of this government to secure a trade deal within a very tight timeframe. Below we explore the outlook for the UK’s economy and her capital markets in the context of last night’s election result.  

Trade deal?

The Brexit process will take one firm step forward after tonight. Now we get to the complicated bit. Assuming no extension to the previously agreed transition period, the UK will lose access to the EU’s single market at the end of 2020. A trade deal will need to be hastily hashed out to avoid yet another cliff edge with all its attendant effects on private sector confidence and the economy. Much will depend on how much the UK wishes to diverge from its current regulatory posture. As at now, there is obviously harmony between the EU and the UK on this front, suggesting that a close to status quo trading arrangement should be doable within the very tight time frame allowed. The more the UK wishes to diverge, the unlikelier that end of 2020 deadline becomes. If an extension to the transition period is to be sought, it likely needs to be done by the summer of 2020. 

Policy

Predicting elections is one thing. Guessing at the potential policy implications, and when they might land, is another thing altogether. Institutional checks on executive power, changing priorities and rotating doors are parts of the story that unfortunately tend to frustrate our ability to say anything particularly authoritative here too. What we can say is that this is now a Prime Minister unrestrained by the demands of coalition partners or even conservative party factions. The size of the majority suggests a freedom not seen by no 10 since the early years of new Labour and Prime Minister Blair. However, what this new found freedom means for policy remains to be seen. A new constituency for the conservative party following the rout of labour in the North may well suggest a new definition for ‘one nation’ conservatism. A looser government wallet over the coming term seems a reasonably widespread expectation.

The economy now

The latest data on the economy tells us the UK is more or less at a standstill. The Brexit saga can almost certainly lay claim to some of the slowdown experienced by the UK economy over the last couple of years. The swoon in activity experienced by large chunks of the world economy for the last year or so accounts for much of the rest of it. The latter headwind should ease as a little this year in our view. The world economy is already looking a little less groggy on the basis on incoming data. A fresh global boom is not currently on the cards. However, stabilising business confidence, combined with low inventories and stimulative monetary policy should be among the factors that allow the world economy to accelerate a little in 2020. 

We would be wise to expect the headwind from Brexit uncertainty to remain in place for longer. Nonetheless, with an economically palatable path out of the EU now becoming a both a little clearer and nearer, the backdrop for investment should begin to improve a little. Risks remain of course, as noted above, but both domestically and indeed globally, some important ones seem to be retreating for now. 

Investment implications

For the world’s investors, a night of UK electoral drama was totally swamped by news of a phase one trade deal between the US and China. An agreement here, as now seems likely, seems sure to underpin the nascent recovery in global business confidence. It is the brightening chances of just such a deal that are at the heart of the sharp moves in global stocks and bond yields over the last month, including those in the UK. 

As we noted in our recently published outlook publication, Compass, we should look to the new year with the usual mix of cautious optimism and humility that a study of the past gives us. Growth remains the norm. The political backdrop continues to be disconcerting in some parts of the world at the moment, but remains less influential than feared. 

Parts of the world’s capital markets are expensive, perhaps dangerously so in some instances. Investors have been guilty of overpaying for safety and protection in what has been an understandably jittery economic cycle. However, we don’t think stocks are prohibitively priced still, even if the profits outlook is a little meagre. A diversified, multi asset class fund or portfolio predictably remains the best weapon to bring to bear on all of this uncertainty and opportunity.

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*This article is for information purposes only. It is not intended as a product offer or investment advice.