Our Opinion: 2020

What Brexit means for your money

The UK has finally left the European Union – taking one referendum, two general elections and three prime ministers to get here. What happens now?

The immediate answer is: nothing. The “Withdrawal Agreement” has come into force, which effectively keeps everything as it is, but sets the stage for 11 months of talks to decide on a future deal governing trade and the wider UK- EU relationship by the end of the year.

While it may look as though nothing has changed, there are in fact major differences between where we are now and the various ‘cliff edges’ that the UK has faced over the past three-and-a-half years.

For one, businesses now know for sure that ‘remain’ is no longer an option. Even if the UK were to change its mind tomorrow, it would need to reapply to be a member. So even with months (perhaps years) of talks ahead of us, the end destination is far clearer than it was. That’s a big step forward for businesses. They may not yet know exactly what Brexit will look like, but they know for sure that they’d better prepare for it, and they also have an explicit deadline.

It’s also a big step forward politically. For as long as the UK itself was divided as to the way forward, there was no reason for the EU to engage seriously with talks. Why bother, when the country might change its mind at any point? Now that Britain has left, it makes sense to hammer out a deal that works for both parties.

That’s not to say it will be easy. Debates over financial services and fisheries will probably hog the headlines during the first half of the year. And when you throw efforts to achieve a US trade deal into the mix – and how that might interact or conflict with any EU deal – it becomes even more complicated. Even if a deal is agreed by the end of the year, it’s likely to be a bare-bones effort that pushes more detailed negotiations further into the future.

So what are the implications for investors?

UK government bonds (gilts) are probably the least-affected British asset class. For now at least, yields on most developed-world government bonds follow the general direction of global interest rates and that’s likely to remain the case, even if the government does unveil a decent-sized spending package under Chancellor Sajid Javid at the budget in March.

Rather than via gilt markets, the way global investors have expressed their concerns about Brexit has been by selling off (or buying back into) sterling. That’s unlikely to change this year. The pound is off its post-Brexit lows, but 2020 promises to be a bumpy, headline-driven year, with sterling being particularly vulnerable to fears that the UK could end up with no explicit trade deal at all at the end of the year. So while it’s a good idea to increase exposure to the UK, that doesn’t mean selling all of your overseas exposure and betting it all on Britain.

The most obvious investment beneficiary of extra clarity on Brexit is the UK equity market. Despite its recent burst higher, Britain is still cheap relative both to its own historical valuations and to other global markets. It is the attractive dividend yield offered by UK stocks that is likely to prove too tempting for international investors  who are still hungry for yield against a backdrop of low interest rates. As a result, even in a year in which equities are unlikely to shine as brightly as they did in 2019, a gradual unwinding of the ‘Brexit discount’ on UK equities is likely.

11th February 2020