Bye bye Brits – now the hard part starts

What lies ahead for the UK and the EU, and what is the significance for your investments? Danske Bank’s strategy team gives their assessment.

Three and a half years after the historic referendum, the UK finally left the EU at midnight on 31 January. However, not much will immediately change. During a transition period lasting until the end of 2020, the UK will continue to follow the EU’s laws and regulations and be part of the single market and the customs union – and EU citizens in the UK (and vice versa) will continue to have the same rights as before. However, politically, the UK no longer has a say in the running of the EU.

Tight timetable

During the transition period the UK and the EU have to agree the terms of their future relationship – and from a financial perspective that mainly means a potential trade agreement.

“It is only now that the really difficult negotiations begin – namely those determining how the two parties will live with each other going forward. Figuratively speaking, the two parties have finally agreed to a divorce, but they still have to work out who should have the house, the car and the kids, and that is often the most difficult part,” explains Danske Bank’s chief strategist, Henrik Drusebjerg.

If they fail to agree a deal, the transition period can be extended by up to two years, but so far the British prime minister, Boris Johnson, is very insistent that will not happen. In fact, the parties have to agree on a potential extension to the end-of-year deadline by 1 July this year.

“This is a very tight and ambitious timetable they are working with – to put it mildly. Other countries can take 15-20 years to negotiate a trade deal,” says Henrik Drusebjerg.

Uncertainty could flare up again

While financial market uncertainty on Brexit has eased in recent months, it could well return with undiminished strength, according to the chief strategist. Worst case is the ongoing risk of a hard Brexit, where the UK and the EU definitely say goodbye to each other at the end of 2020 without an agreement – a so-called no-deal Brexit.

“In that case all future trade between the two would be in accordance with World Trade Organisation (WTO) rules, which would make trade more expensive and more difficult than at present. That could have a very negative effect on the economy and the financial markets in Europe generally and in the UK in particular,” explains Henrik Drusebjerg.

Equity overweight maintained

However, Danske Bank’s main scenario is that we won’t get that far, but that a deal will be agreed between the UK and the EU. One possibility is an agreement to begin to diverge from each other over time in certain areas; ie, a de-facto extension without it being politically presented as such.

“Nor has the continuing uncertainty shifted the overweight in equities in our portfolio solutions – in other words, we have a greater share of equities than we expect to have over the long term. We generally continue to expect that stable global growth, strong labour markets and accommodative monetary policies from the central banks will make equities more attractive than bonds in the coming year – even though the Coruna virus from China is currently causing a lot of nervousness,” says the chief strategist.

Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.

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