In the midst of the fireworks of the US election and the grinding pain of the pandemic, you could be forgiven for forgetting all about Brexit.
But, as was so clearly stated at the start, once the Brexit process started it would be unstoppable. This week marks another clear deadline in the final process to secure a trade deal with the European Union.
The deadline is admittedly artificial. It was set by the UK to scare EU negotiators. Such tactics have not worked for the past four years and there is little hope it will work now. The real deadline is the 31 December of this year – if a deal is not reached then the UK crashes out on World Trade Organisation trading terms. This means tariffs and extensive customs checks at the ports.
There were those who supported the UK’s exit on the basis of deeply-held political views about UK sovereignty. Such views are a matter of personal belief and nobody can dismiss them. However, there were others who argued the UK would be in an economically stronger position outside of the EU. This can no longer be considered a rational view.
It is clear that should a deal not be reached, there will be significant disruption to UK trade at the worst possible moment – as the country grapples with the deepest recession of our lifetimes.
Despite his protestations it is likely that prime minister Boris Johnson is well aware of the stakes in reaching this deal.
It appears that two key issues remain: first, is the freedom the UK has to provide state aid to companies and industries in distress. The second is over fishing rights. The UK is demanding free access to sell our fish to Europe, but also seeking to revoke the EU’s rights to fish in our waters.
The first obstacle can be overcome through rigorous nuanced monitoring regimes. Politically it is not a cause close to the heart of the Brexit-supporting public. The diplomats can negotiate a compromise here that is sellable on both sides of the channel.
The second is trickier. Fisheries make up just 0.1% of the UK economy. The consensus is that should the UK refuse to strike a trade deal over the issue the economy will be 8% smaller in 10 years time than it would have been. Economically then there is no good argument for making fisheries the hill to die on. Even if enormous subsidies were given to the UK fishing industry it would still be more cost-effective than a no-deal exit.
However, fisheries are an unusually powerful political issue. This is partly because it seems to get to the heart of our island nation’s identity – the brave young men and women venturing out against nature to bring back our fish. The same is true in France where president Emmanuel Macron has suggested he may vote down a deal if he is not able to gain the fishing access he wants.
We are therefore in the realm of a politically-powerful issue that is economically insignificant. This is a dangerous place to be and the risk remains that the boisterous right of the parliamentary Conservative party will force the government to stand its ground here.
So what would the different scenarios’ mean for markets?
We can say with some confidence that no deal would lead sterling to fall. This would boost the value of our holdings overseas. There is also a line of thought that the fall in sterling would cause the FTSE 100 to rise. This trend has been in place since 2016. Yet this should not be assumed. Over time there have been periods where sterling has fallen and so has the FTSE 100. It would also largely be bad news for medium-sized UK companies.
In contrast securing a deal would cause sterling to rise but probably less so. Would it therefore cause the FTSE 100 to fall? Our core view is that there may be an initial reaction such as this but that in the long-term the supportive nature of the deal would ultimately lift even those UK shares with significant overseas earnings.
Reverberations like this do not in themselves lead us to believe we should adjust our positioning in light of this deal. We are cautiously positioned on the UK and this is unlikely to change with or without a deal. Our problems run deeper than the Brexit issue.
At the current time it is not possible to accurately forecast the outcome of these negotiations. We can take some comfort that the range of issues has narrowed and narrowed to issues that are not truly economically significant.
However, it is far too early to say a deal is likely – this is not an age where cold economic rationalism is driving policy decisions.