January and February 2017 saw a great deal of political debate, after the Supreme Court ruled that Article 50 – the notice period for leaving the EU – could not be triggered without parliamentary approval.
This meant the government had to introduce a special Brexit bill that was swiftly approved by MPs at the House of Commons and – after a lot of further debate – the House of Lords. This allowed Prime Minister Theresa May to trigger Article 50 at the end of March.
A slow journey
We are, without doubt, still in the very early stages of Brexit – the whole process will take years. The next step is agreeing the terms of Brexit, with a significant number of details needing to be agreed between the British government and EU ministers. In January, Theresa May gave a speech that revealed the 12 negotiating priorities the government will focus on. They include trade deals with both EU members and other countries around the world – which is the area markets will be especially interested in. The triggering of Article 50 means the UK government has a maximum of two years to complete negotiations. With so much at stake, a bumpy path may lie ahead.
Even after the terms of Brexit have been agreed and the UK has formally left, the government still has to decide which EU laws to keep and which to discard. In total there are 80,000 pages of EU agreements to renegotiate. Some of these agreements currently govern the way UK businesses operate, and the consequences of changing them could be significant.
In the meantime markets – both UK and abroad – have generally performed well. For investors, one of the most notable effects of the Referendum result has been the value of UK Sterling. On the eve of the vote (23 June 2016), Sterling was worth $1.49 – but two weeks later it had fallen to $1.28 and as recently as 16 January 2017 was as low as $1.20. Over the early part of 2017 Sterling has stabilised. Weak Sterling has been a positive for some UK investors – particularly those who hold global assets. When overseas gains from market rises have been converted back into Sterling, the favourable exchange rate has further improved those returns.
Currency movements have been making a big difference for investors. For example, when measured in UK Sterling, the MSCI World Index (which tracks leading equities across 23 developed markets) delivered a 2016 return of 28.2%. When the MSCI World Index is measured in local currency, the return was 9%.
Daniel Howard, Technical Research Manager at Skipton
The fall in the value of Sterling has proved a positive development for UK companies who export their goods and services, or who have business operations overseas. This is because prices have become more attractive to overseas importers, potentially boosting export volumes.
The strong performance of stock markets since the Referendum result is a positive; although this is part of a wider trend of other key events, such as the US election result, that has seen some sectors benefit to a greater extent than others. Certain fund manager styles have thrived under these market conditions, boosting investment returns. In the long-term, any improvement in Sterling’s fortunes could slow the momentum of UK companies who rely on exporting for profits – if not reverse the trends. Should the government be able to report on progress in maintaining free trade deals with EU members, agreements with other nations, or if markets anticipate a delay to the Brexit process, Sterling may start to rise again. This would benefit some organisations.
Brexit is going to continue to be front page news for a long time. With such high stakes, future market volatility certainly can’t be ruled out. However, businesses and investors should have some notice and time to adjust.
Across the channel
On the other side of the Brexit negotiating table, uncertainty is also prevalent. Brexit is as much of a focus in Europe as it is in the UK, and there are also several high profile elections scheduled to take place this year.
The Netherlands went to the polls in March, with France's held in April and Germany'sin September. As we saw in Britain and the US in 2016, political shocks can happen.
Daniel added, “Elections can often be unpredictable at the best of times; but if there was to be any prospect of an upset in these elections, market uncertainty could rise quite significantly. It is definitely an area that investors and funds need to be mindful of over the coming months.”
Meanwhile the problem of the Greece debt crisis has been in the news, with doubts surfacing over the nation’s ongoing ability to meet the terms of the EU bailout programme. The International Monetary Fund has painted a bleak picture on Greece’s finances, with EU leaders urging the Greek government to agree to fiscal reforms or leave the EU (a Grexit).
Daniel summarised, “Recent issues with Greece aside, it has actually proved to be a quietly positive period for the EuroZone. The outcome of the EU Referendum clearly caused uncertainty; but from July and to the end of the year, the Eurozone ZEW Economic Sentiment Index – which measures the mood and economic forecasts of industry experts – had climbed by 30 points.”