Brexit: the journey and the destination
The UK's exit from the European Union (EU) is happening in the context of COVID-19 and massive policy stimulus. We explore what it means for markets over the immediate horizon and further out.
WHAT YOU NEED TO KNOW
- Brexit is more like a process than a single event happening unexpectedly. With a large part of the possible impact already reflected in asset prices, we doubt that the knock-on effects on confidence and financial conditions are likely to be very large.
- While some short-term disruptions are inevitable, our view is that the virus outbreak is seen by the UK Government and the Bank of England as warranting ongoing policy support. This should mitigate any Brexit impact too.
- A ‘skinny’ deal shouldn’t be a big market mover. A no-deal scenario is likely to see gilt yields falling close to zero, sterling weakening to parity versus the euro and UK domestic stocks underperforming more global ones.
HOW WE THINK ABOUT POLITICAL RISK
Political risk tends to have a particularly pronounced effect on markets when it’s about a single, cathartic moment that tightens financial conditions, triggers a credit crunch and, therefore, risks putting the economy in recession. Examples include the Greek referendum on cash for austerity years ago, as well as votes that formally or informally were about euro membership: the French elections of Macron versus Le Pen and the Italian elections when anti-euro parties featured prominently.
Brexit is different. It’s a process, not a single event – a series of potentially small negatives that, if summed up over a long timeframe, may perhaps turn into a bigger negative for the UK economy relative to a no-Brexit counterfactual. But, taken individually, the impact isn’t going to be that much. And these effects are based on no-policy-change assumptions (other than Brexit).
So, looking beyond a likely adjustment period, a negative impact is not necessarily a given. Although some near-term disruptions on export/import and currency flows is likely while uncertainty rises, over the longer term we’d expect the trade relationship between the UK and both the EU and the rest of the world to evolve. The structure of the domestic economy should adapt too, which includes London as a financial centre, with no competitor at the moment on the same scale within Europe’s time zone. So the overall impact over many years remains very much an open question.
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Chief Economist & Macro Strategist
Group Head of ESG, Sustainable and Impact Investing
Group Chief Investment Officer
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