Brexit

At my age generally time flies but in the case of Britain leaving the EU it seems to be taking forever.

Today marks the start of the last year of our membership of the EU and finally the end is in sight.  I say this not because I am a rabid leave voter, in fact I voted remain, but once the decision was made to leave it was key for both parties to expedite a workable exit without dragging the process out unnecessarily.

Nobody likes uncertainty and markets and businesses certainly don’t.  Hopefully those negotiating our future can come up with a sensible deal for both sides but whatever happens certainty will be better than further dithering from an investor’s standpoint.  Although I voted remain I do not believe a country that has the world’s 5th largest economy will be unable to cope outside of the EU. 

Let’s be honest we are only just behind Germany in size and nobody would dream of suggesting they would struggle on their own.  But just as the “leavers” boasted about having a further £350m a week to spend on the NHS and the “remainers” stated the world would end if we left the reality will no doubt be somewhere in the middle.

So what are the facts?

The truth is the amount of our goods and services we export to the EU has fallen from a peak of 60% in 1990 to just over 40% today, with China, India, Brazil and the US growing substantially in that time (Source – Office for National Statistics).  Therefore although the EU remains our main market it is not as large as it was 25 years ago.

When one looks at the trade deals the EU has in place with the rest of the world (which given the time the EU has been in existence is a woefully short list) there is every chance we could gain an advantage by negotiating deals with these countries well before the behemoth of the EU which requires all 27 member states and god knows how many Belgian regions to agree.  No guarantees of course but these are unlikely to be worse than the terms we currently have in place.

As for not being able to get a trade deal with the EU post-Brexit, I find this hard to believe.  The UK is the second largest consumer of Champagne after France and also 20% of cars manufactured in Germany are sold on our shores.  As well as this Italy, the Netherlands, Spain and Portugal all export far more to us than they import, with Ireland topping the lot with 15% of its exports coming to the UK.  I cannot imagine these countries enjoy listening to the rhetoric of Michel Barnier which actually hurts them more than us.

We have heard a number of scare stories about financial services companies leaving London and decamping to Paris or Frankfurt, but although some jobs will undoubtedly move the impact is looking like being far less than was originally suggested.  Indeed Deutsche Bank signed a lease on its new London headquarters last summer and have suggested that only a few hundred jobs will go rather than the 4,000 originally quoted.

Of course there are hundreds of areas that will be impacted after Brexit and I have focussed only on some of those that have an impact economically as that is what drives markets.  No one knows what the outcome will be, particularly in the short term, but I suspect life will go on and importantly people will keep spending.

I am sure however the uncertainty has had a negative effect on the value of UK shares.  The MSCI World Index is up by over 32% since the Brexit vote whereas the FTSE All Share is up only 11% (Source- Lipper 29/3/18).  Given we have record numbers of people employed, with real wage growth, and an economy that grew by 1.4% last year (even though banking economists predicted a recession) the performance of our stockmarket seems out of kilter.

A number of fund managers also agree and have positioned their portfolios on the basis that we will do just fine post-Brexit.  If they are correct it would be no surprise to see a bounce in the UK market which does appear relatively inexpensive but of course time will tell.

In the meantime we are bound by EU laws which mean that to continue receiving this missive and Alan’s Letter from Linlithgow after May we will require you to confirm your agreement.  As a result you will receive an email from us in due course letting you know how you can do this but for now I wish everyone a happy Easter.

steve-forbes
Author
Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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