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Hopeful for a Brexit compromise, but outcome of covid crisis still more important to investors

11th December 2020

Commenting on the current Brexit negotiations, Trevor Greetham, head of multi asset at Royal London Asset Management said:

“We are hopeful, though not confident, that a political compromise will be found to enable trade UK-EU talks to continue beyond the weekend but it would be rash to base an investment strategy on the basis of one outcome or the other. Both of the arrangements under consideration reduce the growth prospects for the UK economy but much of the bad news is already factored in. We believe the path the world takes out of the Covid crisis will matter more to markets over 2021.

“The pound is sensitive to news on Brexit as the type of relationship will impact long term growth meaningfully. The Office for Budget Responsibility estimates that under a Canada-style Free Trade Agreement the UK economy will be about 5% smaller than it would have been fifteen years from now, had we stayed in the EU. Under a No Deal scenario, the predicted shortfall rises to more than 8%. To put this in context, the OBR estimates the permanent loss of output caused by the coronavirus lockdowns to be less than 2%, with a lot of activity likely to resume as social distancing measures are eased.

“Sterling fell around 10% after the EU referendum in 2016 and has since traded in a narrow ten cent range versus the euro. In a No Deal Brexit we would expect it to break to the downside by up to 5%. Global equities could also sell off temporarily given the bullish level of investor sentiment. The S&P dropped 5% on the 2016 referendum result, although quickly recovered.

“If there is a Free Trade Agreement we’d expect the pound to rise from current levels. This would hurt returns from overseas investments but domestic growth prospects would improve somewhat, to the benefit of domestic equities and property.

“While Brexit matters greatly over the long run, the path the world takes out of the Covid-19 crisis matters much more for investors in the shorter term. New vaccines provide light at the end of the tunnel. Beyond any near term wobbles, we remain optimistic on stocks, including markets like the UK which did particularly badly going into the lockdown.”