COVID-19 has grabbed the headlines, but the risk of a cliff-edge departure from the EU hasn't gone away either, writes Rowan Dartington's Guy Stephens.
The newswires are becoming increasingly focused on the potential for a second wave of COVID-19.
People in cities across the world are going back into lockdown or, at least, having their freedoms curtailed as infections rise again. This was always a risk, but many had hoped that either better weather, mutations of the virus itself, or the lockdown would prevent this.
Clearly, this virus is very effective at transmission and a vaccine is probably the only way out for our lives to return to normal.
Brexit never went away
Returning to normal means worrying about the passage of Brexit. While the absence of the endless political discussion has been welcome, most would surely choose Brexit tedium over the pandemic. However, like the virus, it continues to fester and there are serious economic implications this winter if we don't get on top of it.
The share prices of UK companies have suffered, alongside the value of the pound, due to the perception that the government has handled the virus poorly. UK equities have fallen well behind the rest of the world so far this year. Some of this will be due to concerns about the impact of the virus on UK earnings; but, as sterling weakens, the returns from overseas businesses will be boosted when converted back into sterling.
However, there has also been no relief from the overhang of a potential no-deal Brexit.
It is difficult for Boris Johnson to agree to an extension, having been elected on a promise to 'Get Brexit Done'. It would be a gift to the opposition parties and a significant manifesto U-turn if he did. The government is on the back foot over its COVID-19 strategy as it is. The last thing it needs is a self-inflicted Brexiteer backlash.
Unfortunately, for the UK markets and sterling, this keeps the no-deal, cliff-edge scenario very much alive. While in the EU, the UK was often on the naughty step for being awkward and not part of the Euro inner club. For now, the UK remains in this transition phase, perpetuating the painful position of half in, half out. There is no more clarity about what lies ahead than the day after the original vote on 23 June 2016. That was over four years ago.
Consequently, the underperformance of UK equities compared to global equities since the Brexit vote has been even more marked.
Doing the deal
COVID-19 has not helped with negotiating a post-Brexit deal, nor with discussing post-EU deals with other nations. Most governments have bigger fish to fry than the UK's Brexit squabbles. If the UK ends up with a no-deal arrangement, then it will fall back onto World Trade Organisation (WTO) rules, with recent references having been made by Boris Johnson to an EU-Australia type arrangement.
So, what is this? In a nutshell, few countries in the world operate under basic WTO rules – they are too simplistic and limited for most to want to follow them. Many have separate agreements on top, covering anything from cars to washing machines, clothing to fresh produce, depending on what the import/export demand is on both sides for each part of the bilateral agreement.
In fact, there is no agreed deal with Australia, but negotiations have been underway since June 2018 to establish a Free Trade Agreement. Johnson has most likely referenced this for two reasons.
Firstly, if much of the heavy lifting has already been done with Australia, replicating this for the UK should be much quicker and will provide a template. Secondly, the EU will be accused of post-Brexit UK discrimination if the UK cannot be treated in the same way as Australia where tariff-free trade is being considered.
This also follows from the deal that Japan recently agreed with the EU. If the UK is now treated as a 'third country', to quote the EU's own definition, then why shouldn't the UK also have the same trade arrangements as other third countries such as Japan and Australia?
The UK is now more than halfway through the transition period and there has also been very little news on the trade front regarding agreements with other non-EU countries, which was supposedly one of the big benefits of leaving the EU.
There will no doubt be increased commentary on this as we enter the autumn, and the markets need to brace for a second wave of Brexit – as well as whatever the virus still has to throw at us.
Past performance is not indicative of future performance.
Guy Stephens is Technical Investment Director at Rowan Dartington, the discretionary fund management and stockbroking arm of St. James's Place.
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