It’s crunch time for Brexit talks. The deadline for agreeing the terms of Britain’s exit from the EU is fast approaching, and there’s still so much to decide. Can an agreement be reached, or will the UK exit the EU with no deal?
It’s over a year ago now since the negotiations between the UK and EU began, and it has rarely been out of the news since. What is agreed – and not agreed – could have a huge impact on all our lives, influencing the way the UK interacts not just with Europe but the rest of the world.
The negotiation sticking points are well-publicised. Rhetoric from both sides suggests the differences of opinion are chasm-sized. Although what we don’t really know is how much common ground has been found behind the closed doors of the negotiating table. As Scott Ashworth, Skipton’s Technical Research Manager, explains, the considerable politics involved – for both the UK and EU – stirs the pot further, “It could well be that some sort of framework of a deal is agreed, but there’s one party somewhere – on either side – that prevents it going further.
What are the implications for investors?
“There are still key issues where there are areas of disagreement. This backdrop brings fundamental challenges to some aspects of Brexit; but in other areas there are signs of common agreements.”
Over the coming weeks we’ll discover if a deal can be agreed, or if the UK will exit the EU with no deal in place. Either of these outcomes – and all the potential shades of grey in-between – will have an impact on markets.
Scott is keen to stress that currency movements will be one of the key factors to look out for. “There’s no question that, whatever the outcome, markets will be impacted,” he added. “For example, a no deal is likely to mean the value of UK Sterling would fall, at least initially, and some businesses would be operating under something of a cloud of uncertainty. In this scenario, having exposure to global assets could reduce the potential impact – just as it did back in June 2016, when the EU Referendum result triggered falls in Sterling.”
In the past, the EU has waited until the eleventh hour to strike key agreements, such as the financial bailout deal with Greece in July 2015 and the 2016 trade agreement with Canada. When it comes to Brexit, we may see a similar late arrangement, a transition deal, or even an agreement to push the October deadline back.
If a deal can be agreed – markets could swing the opposite way. “The prospect of exiting the EU with the greater certainty of a deal in place could mean a Sterling rally,” added Scott. “In this scenario, having UK and/or Sterling exposure could prove beneficial, compared to global assets.
“There will inevitably be winners and losers from what is ultimately agreed over Brexit, and not all parts of the market will benefit or struggle.”
Diversification is crucial
For investors, the possibility that Brexit uncertainty will have a short-term impact on markets looms large. But it’s really important not to panic, or lose sight of long-term financial objectives.
It's times like these that can underline the value of diversification, such as a strategy featuring both UK and global assets.
Scott concluded, “We don’t know what will happen, or when the outcome will be known. But we believe that having a balanced portfolio of assets, and currency exposures, could be the best approach over the long term.
“Brexit could well be a topic in the UK for years to come. However, it must be put into wider perspective. It’s not likely to be a topic for the rest of the world for years to come.”