Winston Churchill once said, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”. The future relationship between the UK and the EU is considered by our investment team.
Following a tense and long running “will they, won't they” saga playing out in the lead up to Christmas, the United Kingdom and European Union finally reached a historic trade deal, laying to rest the bleak prospect of a no deal Brexit – something both parties were keen to avoid.
Overall, the deal is a positive for both the UK economy and stock markets, given the removal of a no-deal scenario. Most importantly the deal provides for tariff and quota free trading in goods and allows for the UK to regain the ability to set its own laws. This aspect has driven the support for the deal from the European Research Group of Conservative MPs. There will also be considerable levels of co-operation between the two sides respect to energy, ensuring that it continues to flow freely and reinforces mutual commitments to renewable energy and tackling climate change.
There are however, issues with the deal, with UK businesses that export to the EU facing higher costs with additional paperwork and customs requirements at the border, including new arrangements for paying VAT, providing proof of origin, and containing export authorisation numbers. In addition, if the UK does choose to diverge from EU rules in the future, such as labour rights, tax and state aid, it could be doing so at the expense of benefits of the free trade agreement.
The omission of the UK’s biggest export, financial services, from the arrangement leaves a considerable amount of uncertainty for the industry. London has already seen jobs move to various EU financial centres such as Dublin, Amsterdam, Paris, Frankfurt and Milan as firms have adopted a safety-first approach to the Brexit negotiations. It is likely that the EU will continue to view financial services as an opportunity to win market share and will continue to lure lucrative jobs in deal-making, fund management, sales and trading. In a sign of things to come, the European Securities and Markets Authority (ESMA) has already fired the first shot, commentating earlier in January that some UK financial services firms have been engaging in “questionable practices” with respect to the new rules.
As to whether this Brexit deal will prove a success for the UK is yet to be seen. Rather than marking the end of the story, it marks the beginning of the UK’s new relationship with the EU, which will evolve over time. Ultimately, much will depend on the policy decisions of the UK government, their ability to negotiate good trade deals with the rest of the world and the actions of the EU and leading European countries such as France and Germany. As Winston Churchill once said “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.
With respect to CCLA portfolios, it is unlikely that these developments will drive any meaningful change to positioning. We remain long term global investors, seeking to identify high quality companies with multiple sources of growth opportunities and our UK holdings are not particularly domestically focused. Moreover, while there is now more certainty as the UK’s path outside of Europe, the deal has served more to limit the damage of exit then to unleash any immediate benefit which would encourage greater exposure to the UK economy. In the near term, the outlook with respect to covid-19 is more likely to drive economies, markets, and portfolio positioning.
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