As 2018 winds down, we are faced with the fact that Brexit and the cloudy uncertainties it poses on UK businesses and investors continues to drag on. Although it is difficult to predict what will happen given the range of outcomes and indeed the range of forecasts on the impacts of those outcomes, we at Canada Life Investments in London feel it is important to communicate a brief analysis of it as we move into 2019.
The greatest risk arguably is in the event of a no-deal and, as recent scenes from Westminster suggest, this is looking more likely. Nevertheless, this is not the central scenario and there is a spectrum of forecasts as to what a no-deal outcome’s impact on the economy would be. It would likely cause a considerable amount of disruption in the short term as firms adjust to the unknown environment, while the longer term outlook points to a continuation of slower growth simply because Europe is our nearest trading partner and Brexit puts obstacles in place to slow that trade. Other, faster growing markets will be available to the UK, but since they are farther away it will take time to develop and make up for losses in Europe. Sterling would inevitably take another hit – perhaps falling 10% in the short term – as inflation spikes and assets depreciate. Opportunities in UK equities could arise given the amount of non-UK earnings in the FTSE, but UK-focused companies would become much more sensitive, especially those in retail and housing. Government bonds would remain strong.
At this stage, the prospect of Theresa May winning the UK’s Parliamentary backing for her Draft Agreement with the European Union (EU) looks slim; however, the markets are likely to react positively to the possibility of another agreement being reached. UK businesses would benefit from a transition period and sterling would rally perhaps by as much as 10%. In such case, government bond prices would fall. With a bit more certainty, growth would pick up its pace and delayed spending, particularly from businesses, would bounce back.
Markets would become largely unmoved but growth would continue to dwindle as uncertainty persisted. Volatility can always throw out opportunities, but the extent of uncertainty surrounding Brexit reminds us of the importance of diversification.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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