Now that Article 50 is triggered, many people are wondering what impact it might have on markets and which developments we should be paying most attention to.
Although the details are still uncertain, I caught up with some leading fund management companies to get their views and shed some light on what lies ahead.
Short-term uncertainty in a long-term process
At the moment, it’s likely that markets will be driven by sentiment, rather than logic, as investors digest each development over what will be a very gradual process. All the managers I spoke to discussed the potential for short-term volatility, especially in currencies, as uncertainty continues.
Richard Buxton, Head of UK Equities at Old Mutual Global Investors, explains:
“Logic would suggest that the triggering of such a momentous event, and one which everyone knows is coming, should be fully discounted in share prices. So, in theory, the triggering of Article 50 should have little impact on stock markets.
“The problem is that we are not necessarily dealing with logic. Brexit negotiations will be more of a gradual process over the course of the next two years, with the position of European governments, and that of the UK government, diametrically opposed. The ensuing volatility of those drip-drip negotiations could impact investor portfolios.”
Many of the UK’s trade agreements are through the EU – and each of these will need to be renegotiated. As Columbia Threadneedle Investments highlights: “This is a colossal undertaking in just two years. The countdown to Brexit has begun, but that’s the only clarity we have.”
The currency conundrum
We’ve all witnessed a weak sterling against major European currencies and the US dollar since the UK voted to leave the EU. So if you’ve held overseas equities, you’ll have seen the sterling value of your investments increase since the assets you hold are in appreciating foreign currencies.
Olly Russ, Manager of the Liontrust European Enhanced Income Fund, explains that once the uncertainty over the triggering of Article 50 is resolved, this situation may change if sterling starts to recover.
On the flipside, Keith Wade, Chief Economist & Strategist at Schroders explains that if we were to see repeated falls in the pound feed through into wages and price expectations then the Bank of England would have to tighten monetary policy:“I think that would create a very difficult situation for markets in the UK, particularly the bond markets.”
The UK Equities Team at Invesco Perpetual add: “Sterling will remain a key instrument to watch over the near-term, as movements in currency will continue to impact the extent of the wider market response. Political events in the US and Europe have added an additional twist to the outlook for major global currencies, and we have observed the market thinking more carefully about currency implications.”
You can find out more about the outlook for sterling and how currency movements can affect your investments in my previous article.
Which announcements should we pay most attention to?
Overall, decisions on trade agreements and tarrifs are the ones to watch most closely. Everyone I spoke to cautioned perspective and patience – while we will hear about various developments over the coming months it will be some time before we have the benefit of certainty, with the bulk of important decisions likely to come in 2019.
Stephanie Kelly, Political Economist at Standard Life Investments, notes that there’s a spectrum of options for the new trading relationship, ranging between full European Economic Area membership and a World Trade Organisation (WTO) relationship:
“Overall, the closer UK relations with the EU resemble actual membership, the less disruptive it will be for trade and associated activity. The most disruptive outcome would be a fall back on WTO rules, which would imply material rises in both tariff and non-tariff barriers.”
Columbia Threadneedle Investments believes that “The first few trade agreements will be key. If they are negotiated quickly and on reasonable terms the markets should respond positively. If they reveal signs of conflict, you could see the reverse.”
Some tariffs are likely to be raised on certain British exports and in return the UK will levy tariffs against the EU. Olly Russ, Manager of the Liontrust European Enhanced Income Fund, suggests what some of the potential implications of this could be:
“If sensibly done, honour could be satisfied all round by raising tariffs on things we don’t export much of to the EU (English wine for example) and vice versa. Getting the whole EU to agree to anything is likely to be a protracted process and the UK may default to WTO tariff arrangements in the short term. This is not ideal, but even that is by no means a disaster for the UK – the US does very nicely exporting to the EU without being inside the tariff wall or a member of the Single Market.”
As ever, a long-term view is essential
Given the timescale, the complexity and enormity of the decisions involved in the UK’s exit from the EU, we can expect the tone of news to ebb and flow and this is likely to cause pockets of market volatility. Meanwhile, the long-term economic impact is still uncertain and will remain so for a considerable time.
It’s crucial at times like these to remain composed and stick to your long-term plan – remember that selling during short-term market falls can lock in your losses. If you have any questions about your investment strategy, and how the Brexit process may impact it, your 1825 Financial Planner will be happy to help.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go up or down, and may be worth less than you paid in.
Content in this section is provided by Standard Life Investments and external fund groups. It does not constitute any financial or other professional advice or recommendations. Content from external fund groups does not represent the views or opinions of Standard Life group.