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A harder stance on Europe

Leigh Himsworth

Leigh Himsworth - Portfolio Manager, Fidelity UK Opportunities Fund

If the bookmakers are to be believed, with mostly ‘harder’ Brexiteers in the running - Boris Johnson, Dominic Raab, Michael Gove and so on - it is likely that the next leader will attempt to take a tougher stance with Europe. A change of Conservative leader should also see the odds of a general election diminish in the near term as the new prime minister seeks to extend his or her tenure for as long as possible.

Theresa May in Downing Street

So, what does such a shift to the right imply in the near term? The most obvious consequence is that the current Withdrawal Agreement negotiated by Theresa May is clearly dead in the water. The new prime minister will have to negotiate afresh with the EU, something I would suggest they have only limited appetite or patience for. This suggests that the chance of a ‘no deal’ or a new referendum have risen somewhat. 

Given it is far easier legally and in terms of parliamentary process to take the UK to a ‘no deal’, as no further legislation is required, I believe the tea leaves would point this way, unless by some miracle the new prime minister can charm the EU over the summer recesses into some wonderful new deal. I see this as highly unlikely.

Market reaction to the increasing chance of a ‘no deal’ exit
This will have a few implications for financial markets. Primarily, I expect a fall in the value of sterling. We should remind ourselves that the Withdrawal Agreement or a ‘no deal’ is only the first step - the UK subsequently needs to negotiate a trade deal or determine its future relationship with Europe.

Clearly this could take many years, especially given a ‘no deal’ implies wrangling over monies owed as just the first among many steps. And the reception from other countries when the UK comes to negotiate new trade deals may not be as warm as first hoped, as the ongoing US-China spat demonstrates.

My view is that the immediate impact will fall less on stock market related sectors, hitting areas such as agriculture, healthcare and education far harder, certainly at first. A drop in sterling may also well cause inflation to rear its head again, spelling trouble for the whole economy.

However, any short-term market decline due to a ‘no deal’ may offer more of an investment opportunity than a threat. Of far greater importance to investors will be the direction of US monetary policy and its effect on bond yields, in addition to the current trade issues with China that threaten to weaken the global economy far more than the UK’s local issues. The FTSE All Share is already trading at a discount to its peer group and this may prove to be an attractive entry point if one remains highly selective.

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