Brexit – it’s part of a process, the journey will evolve

As we entered the New Year in 2020, the all-encompassing news flow was about the Brexit transition period and whether the UK Government would secure a new deal with its European friends and allies. As we closed out an extraordinary year, almost wholly defined by a coronavirus pandemic and its multitudinous rippling effects, we now return, once again, to Brexit, although this time as fact and not theory, for we have Brexited. 

However you voted in the EU Referendum back on 23rd June 2016, the fact is that we enter 2021 with a deal signed, sealed, and agreed, which enables tariff and quota free trading in goods. Uncertainty, of course, persists on the future of services which did not form part of the agreement and which makes up such a large part of the UK economy. The UK’s financial services sector will particularly be keen for agreements on equivalence to be resolved as soon as possible.

Herein lies an important point. Whilst 1st January 2021 means the end of transition and Brexit actually becoming fact, it still remains part of a process of discussion and negotiation as we get used to a new trading relationship and build upon the agreement already reached. 

This New Year we were getting used to the idea of an end to free travel, EHIC cards running out, the requirement for International Driving Permits, a return to roaming charges and losing PET passports, amongst other things. However, a few days later the news evolved. It turns out now that we no longer need International Driving Permits in Europe and the largest mobile operators say they have no plans to introduce roaming charges.  It is part of a process and the journey will evolve. 

UK Stocks jumped in the first trading session after the Christmas break as a no deal scenario was averted together with the passing of a stimulus package in the US. This boosted investor sentiment. However, the news was not all good. Whilst there was a broad rise with Healthcare and Consumer Goods outperforming, Banks fell in value which, given financial services represents circa 7% of the UK’s GDP and 40% of UK financial service exports went to the EU, is unsurprising. We should therefore expect further discussions and, one hopes, agreement on UK Services sooner rather than later. It is part of a process and the journey will evolve.   

Now we are in 2021, what can we expect?

Well, markets will have to wrestle with the counter forces of renewed stimulus and good news on vaccine roll out on the one hand, balanced against the spread of a more transmissible, new variant Covid-19 and the threat to growth with renewed lockdowns on the other. I have previously written about my feelings that Brexit was another noisy instrument in an increasingly discordant orchestra and now that it has occurred, the reverberations will continue. It is part of a process and the journey will evolve. 

Brexit will not produce a binary outcome, neither all good nor all bad. The market largely thought that a deal would occur and so it transpired. This conviction led to a muted rally, extending gains made since October 2020 as vaccines came on tap. Perhaps now we will see renewed business investment that had been held back as a vaccine induced recovery releases cash hoarded by some businesses and individuals who had built up reserves. This renewed optimism faces the challenges of a resurgent virus. Ultimately, we cannot predict the epidemiology of the virus and therefore no-one can be certain whether our escape route is ‘V’, ‘U’, ‘W’, ‘K’ or square root shaped (inverted or otherwise). It is part of a process and the journey will evolve. 

One thing this evolution has done is to turbo-charge the journey. In some respects, the vision for the future has become the reality of today. Who would have thought that so many people could work so effectively from home and that some businesses could move almost entirely online overnight? Who expected that on Boxing Day just gone 50.7% of the UK’s daily electricity requirement would be met by wind power! Sometimes these storms (storm Bella in the case of Boxing Day) bring with them new opportunities and themes. They are part of the process and the evolution of the journey. ‘The Internet of Things’ we dreamt about for tomorrow became the Internet of things we could do today. Opportunity arose, the journey evolved. 

2020 was a challenging year for investors and human beings generally. A pandemic combined with geopolitical risks (that noisy orchestra within which Brexit played) to give us an unprecedented market environment. A colleague of mine wrote in an internal note, that “the potential to make classic behavioural mistakes driven by emotion, short-termism, and skewed risk perceptions are never greater.  Yet the year is also testament to the benefits of being aware of our most damaging behavioural tendencies. 2020 was a behavioural stress test for investors”. 

In making any investment decision, there are risks in doing things and there are risks in not doing things. It’s a mantra I always tell my clients. I like to think that sometimes it brings people back from the brink. Investing is a process. The journey evolves. We can sometimes get bogged down in the minutiae of an event such as Brexit and not hear or see what the storm brings in. 

This article has been written by Alex Hatfield, a Partner and Chartered Financial Planner at The Private Office. Alex has been with The Private Office since 2014 after a prolific career as a senior financial adviser following his graduation from Hull university with a BSc in Economics in 1991. For more information about Alex Hatfield take a look at his profile here.

The views, thoughts and opinions expressed in this article belong solely to the author and do not necessarily reflect those of The Private Office.

The content is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Most importantly, investment returns are not guaranteed and you may get back less than originally invested; past performance is not a guide to future returns.