Deal or no deal?
Brexit is, once again, dominating the headlines. Do UK stock market investors care?
Thousands of column inches have been devoted to it. Countless cups of tea and coffee have been consumed over it. While the UK formally left the European Union (EU) on 31 January 2020, the country has been in a ‘transition’ period since then, continuing to abide by all EU rules and laws. That will officially come to an end on 31 December 2020.
Currently, the EU and the UK are negotiating hard as to how best to come to a settlement on trade. Each side is keen to avoid a situation where taxes are placed on each other’s goods, making it ultimately more expensive for consumers as a result of higher prices.
But how are the latest developments affecting investors? Financial markets, after all, dislike uncertainty.
In terms of the talks, a hastily arranged three-course dinner between Prime Minister Boris Johnson and European Commission president Ursula von der Leyen, lasting three hours, decided just one thing. The deadline for talks on a future trade deal between the UK and the EU would have to be extended by a matter of days.
At issue are two main sticking points:
- Control over the UK’s fishing rights and quotas.
- The rules on state aid. (Up until now, the UK has been prevented under EU laws from giving help to domestic companies. Once the transition period is over, the UK government is under no obligation to be bound by those laws. The EU worries this will give some UK companies an unfair advantage if they are effectively being subsidised.)
What happens if there is no deal?
It’s perfectly possible that the UK leaves without a deal. At the same time, it’s also feasible that the two sides keep on talking and extend the transition period beyond 31 December 2020.
Given such a fluid state of events, we are unable to indulge ourselves with ‘what ifs?’ until we have a clearer picture of the future relationship between the UK and EU.
Inevitably though, if there is no deal, we believe there will be a negative impact on UK investments, such as prices of company shares and UK government bonds (a government bond is effectively an IOU for which the lender receives a fixed amount of interest over a period of time) as well as an effect on the value of the pound relative to other currencies. This, to some extent, could, we believe, be offset by action from the Bank of England to help inject more cash into the UK economy, so calming investor nerves.
Reasons to stay invested
At the time of writing, investors in the UK stock market seem to be cheered by events elsewhere. Namely, the arrival of several effective vaccines to help arrest the spread of the global pandemic, as well as the possibility of the US government injecting even more cash into its economy, so helping the global economy overall.
But while media headlines over Brexit continue to rumble on, as investors we should remember that staying invested in the stock market rather than trying to buy and sell company shares as a result of events is infinitely preferable as we remind ourselves of the reasons to invest in the first place.
Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.