Investor’s choice– a Johnson put or call

Teaser: The UK economy has been in a fluctuant on and off crisis mode since the Brexit vote years ago, though combined with the economic effects brought about by the Covid-19, this mode is on the rise again in the coming six months.

The Brexit negotiations may have been delayed due to Covid-19, but the virus did not cause the Brexit to disappear. On the 15th June, negotiations between the EU and United Kingdom officially resumed. The talks showed that the positions of the two parties have not been moved in the meantime either, at least at first glance. At the same time, the Brexit negotiations reaffirm the enormous amount of uncertainty, variables, and complexities that currently surround the British economy.

On the surface, the comments at the press conference after the reassumed talks seemed like the hard fronts are still present, which they are. But even something as central as access and quotas for commercial fishing in British seawaters was in fact, not denied quite as categorically as before.

Some argue that 45 pct. of the UK exports is shipped to the EU, but only 10 pct. of EU’s exports go to the UK, so the British will have to accept EU’s conditions. UK's top 5 export markets clearly confirms the EU's importance for the British exporters (graphic one). Conversely, the UK is naturally also a huge importer from the major EU countries (graphic two). From a German point of view, Britain is Germany's fifth-largest export market, not far behind China, and Germany's trade surplus with Britain is about $ 40 billion. This kind of trade relationship is of great importance to Germany, surely, in these times, no one can afford to throw that kind of money overboard.

In my view, it’s not a one way street where UK just has to accept all conditions, because on both sides, there are strong interests in getting some kind of deal in place before yearend, though I could imagine that only a partial agreement comes in place. For example, it could mean that the people's ability to cross borders is not regulated, and the fishery may also have to wait until a second round of the negotiations. However, should it come to a partial Brexit deal securing trade, then it is my assessment that it will be sufficient to provide comfort to the financial market and investors.

The negative economic effects of the Covid-19 crisis continue to weigh heavily, but in the next six months, the Brexit negotiations will again increase in importance and awareness for investors. The effects of the Covid-19 crisis, as well as the Brexit negotiations remain the absolute two major causes of uncertainty surrounding the British financial markets, but fortunately, the financial market conditions are constantly changing.

Where Boris Johnson at the beginning of the year had a very strong domestic position, the situation is quite different now. My assessment is that investors are not yet concerned about the change in Boris Johnson’s standing in a large scale. But in the next half year, I expect investors to increasingly consider whether Boris Johnson and his UK government can handle both the negative effects from the virus and what the upcoming Brexit negotiations might generate in challenging headlines. How that assessment will fall out, I currently consider as very open, but in a few months’ time, it will look like a "Johnson put" or a "Johnson call" in the investor’s views, where a "put" equals even greater uncertainty in the market.

One of the UK’s government’s solutions to the Brexit has long been to negotiate and enter into free trade agreements with as many countries as possible, though this takes time. One of the crucial victories in that context would be a partial free trade agreement with the United States, which the EU does not have. Here, U.S. President Trump has been incredibly supportive towards United Kingdom, and the free trade agreement looked like something Boris Johnson could be sure to sign, whenever he wanted.

But now, the US presidential race is intensifying, which can delay many processes, and it is uncertain who will become the new U.S. president. Not because I think Joe Biden would mind a full or partial trade agreement with the UK, but he may have other priorities, such as a trade agreement with the EU.

For years, I have been waiting and arguing that when there is a definitive Brexit deal, then investments in the UK will become particularly attractive again. It has not yet come this far, but hopefully, the New Year brings so much clarification, that it can be considered as something definitive.

Until then, the next months will bring increased uncertainty. Right now, my plan is when the European summer holiday season is over, I expect to use the increased uncertainty to search for attractive opportunities that will benefit from the Brexit clarity that may be waiting ahead in half a year's time- but under all circumstances, the coming half year will be particularly exciting.

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