What leaving the EU means for your money

We’ve finally left the European Union. It may seem like nothing has changed, but investors need to look at what it means for their portfolio right now, says John Stepek

So that’s it. It’s only taken one referendum, two general elections and three prime ministers to get here. But Britain is finally leaving the European Union (EU). What happens now? The immediate answer is: nothing. The “Withdrawal Agreement” comes 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. Elsewhere, Helen Thomas of Blonde Money looks at how those talks are likely to unfold. Here I want to look at the implications for investors. 

What’s changed?

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 we’ve been perched on 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. 

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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. 

In terms of what to look out for, Paul Dales of Capital Economics reckons that if both sides can agree on “what to talk about and in what order” by the start of March, “it would be a good sign”. If they can’t even manage that, “it would be an omen that the going is likely to be heavy for the rest of the time”. But however it pans out, the point is, it’s happening. So what are the implications for investors? 

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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 as Jonas Goltermann of Capital Economics points out, 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 we think it’s a good idea to increase your portfolio’s exposure to the UK (particularly if you are currently “underweight” relative to where you were before the Brexit vote), that doesn’t mean selling all of your overseas exposure and betting it all on Britain. 

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