Brexit withdrawal agreement – what does this mean for the markets?

Posted by melaniebond

Prime Minister Theresa May spent last week touring the UK with the hope of gaining support for her proposed Brexit deal. This week it has also been a hot topic as Parliament debate the legal advice the government has received on Brexit. Discussions regarding the draft withdrawal agreement have been hitting the headlines daily since the deal was first announced on the 13th November, however, the announcement has had limited impact on financial markets so far, despite some media outlets suggesting so, often by dramatically exaggerating movements in the Pound.

It has been widely reported that Theresa May could struggle to get the proposed deal voted through Parliament on the 11th December. There is some speculation that supporters of the deal are hoping the markets will react negatively to the prospect of it failing to achieve sufficient votes in parliament, spooking other MPs into voting for the withdrawal agreement in order to calm financial markets. The likelihood of this happening is questionable, as investors already know there is a strong chance the deal will fail to be voted through parliament on the 11th December. Ultimately no deal has been finalised yet and so the future relationship between the UK and the EU still remains uncertain. Consequently UK markets and the Pound have not moved significantly in either direction over recent weeks, and the movements we have seen appear to have been driven by global events rather than Brexit.

Looking at stock market valuations, many fund managers and analysts agree that the UK is currently undervalued in comparison to other developed nations. Sentiment on the UK amongst global investors has been broadly negative since the referendum result in June 2016 due to the uncertainty regarding Brexit, however, this is not necessarily justified. Data gathered over the last 18 months does suggest that consumer and business confidence have been dented since the UK voted to leave the EU and, given that consumer spending accounts for around 2/3rds of the UK economy, this has put the brakes on UK economic growth slightly. Pre EU referendum in 2016, the UK was the fastest growing economy in the G7 (Canada, France, Germany, Italy, Japan, the UK and the US), with the rate of economic growth outpacing the G7 average consistently since 2012, however, since the referendum the UK has fallen behind in the G7 rankings and the UK was the only nation in the group to record a slowdown for 2017.

The rate of growth in the UK economy has picked up during 2018 and is now significantly faster than the Eurozone as a whole. With real wages starting to increase, employment levels reaching record numbers and public finances in a relatively healthy state, there is plenty of reason to believe the economy will continue to grow for the foreseeable future, and at a faster rate than other developed nations who have a less supportive economic backdrop. Most economists believe the UK is not likely to enter recession in the near future and so once some clarity is reached on Brexit, we may see the rate of economic growth increase. Whilst the performance of stock markets is not directly correlated with economic growth, the consensus is that the UK stock market has been perhaps unfairly impacted by the uncertainty regarding Brexit.

Investors are happy when the economic backdrop is solid and political events are tranquil, but they are spooked by economic uncertainty and political unrest. It is therefore no surprise that the UK has been out of favour with investors since we voted to leave the European Union. We believe that there is a case for the UK stock market to see a healthy recovery once clarity is achieved with Brexit, whether that be this month or at a later date when a tweaked version of the current deal is voted through Parliament. Consequently we continue to be more positive on the UK than most, maintaining a healthy weighting to UK equities within our portfolios.