This is the year that just won’t stop and as we head towards Christmas we have learned that the UK and European Union are to continue their trade negotiations into the festive period.
Whilst artificially set deadlines for this trade deal have been missed many times, we should remember that the 31 December is a statutory end. We really do turn into a pumpkin at midnight.
When pushed we tentatively express the view that a deal is the more likely outcome whilst acknowledging that this is an optimistic view which sits in contrast to the public statement of the prime minister that ‘no deal is very likely.’
But of course nobody really knows. Our hope is based on the belief that at the last minute economic common sense will trump political belligerence.
The remaining outstanding issues are easily resolvable without any actual compromise of sovereignty on either side. Likewise common sense would suggest that a deal should not flounder on fisheries, an industry that makes up 0.1% of our economy.
As it turns out the French vessels which our Navy proposed to ram back to their side of the channel are fishing for mackerel, a fish we don’t much like in the UK. We tend to send our mackerel to the French anyway.
So even if we take all the Mackerel ourselves and it spills across the quays of every English port – we will have to negotiate with the now very grumpy French greengrocers to offload it.
Still we can all sit on top of our mackerel mountains proud of our preserved British dignity.
Many will say this optimism is naïve after years of political intransigence but the good news is that we do not believe that either outcome will require us to change our portfolio positioning.
There are a number of reasons for this. Firstly, we note that this ‘no deal’ is very different to the one we feared in 2016. There are arrangements in place within the Withdrawal Act to ensure equivalence within financial services and provide for the on-going settlement of citizens caught on each side of the border. Our economic consultants, Capital Economics, term this a ‘co-operative no deal’. They estimate that it could lower GDP growth in the UK by around 1% in 2021.
This is of course unfortunate but we should note that we recently revised up our forecast for UK GDP growth in 2021 from 4% to 8% in response to the vaccine. A no-deal outcome is negative but it would still leave the UK as one of the fastest recovering economies next year. In this context the most serious economic impact would likely to be the inflation caused by a weaker pound.
With this in mind, our view is that in the event of a no-deal outcome we should hold our nerve – and in particular our positions in UK value sectors. We would expect to see a drawdown of some size in UK mid-caps but lower losses in the FTSE 100. We do believe that the market would recover from the initial reaction and without the issue hanging over it continue its recovery.