Deal or no deal, that is the question.
As we head towards the end of the transition period for the UK to potentially strike some type of deal with the EU to avoid a disorderly exit, investors watch closely about the government’s next steps in the negotiations. Brexit talks have been relatively muted throughout the year as the coronavirus pandemic took centre stage, however with hopes of a vaccine and easing restrictions following a second national lockdown, the focus has shifted onto whether the UK will leave the EU with a fair deal.
As it stands, we are possibly closer to a deal than we think. However, key areas of disagreement include the actual structure of the agreement between both parties as possible divergence in one area may cause loss of concessions elsewhere. The most recent issues have been surrounding level playing field commitments and regulations and rules regarding fishing on British fishing grounds, which have caused further delays in reaching an agreement.
Although there are fears of longer-term impacts of a ‘no deal’ Brexit, including increased barriers to entry and trade liberalisation as there may be potential loss of framework between the UK and EU, headwinds caused by Brexit have been felt.
In reality, a deal is inevitable. We are expecting to see a managed divergence at some point, where jurisdiction in both the EU and UK will evolve, and EU loosening its grip on the UK may lead to closer ties with the US, further enhanced with the Biden administration who will have a strong focus on foreign trade and diplomacy. Overall, it is in the best interest of both the EU and the UK to reach common ground from both an economic and political perspective.
Financial markets have factored in a worst-case scenario with investors assuming a 60% chance of a Brexit deal at this point, and although we will see short term volatility which is expected, already trading at large discounts, UK stocks should start to experience an uptick as choppy waters start to settle. Furthermore, clarity from a deal as we head into 2021 may result in dividend recovery as the UK market has traditionally had significant support from yield-seeking investors. An improvement in corporate background would further aid in recovery in UK stocks.
Want to Know More?
If you are not currently a client of our Discretionary Portfolio Management Service, and want to know more, again please speak with your IronMarket Financial Planner in the first instance who can discuss this with you.