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Getting to the bottom of Brexit

An interview with Philip Shaw, Investec’s chief economist.

Topic: Investing

As the Article 50 deadline approaches, instead of taking shape, the Brexit negotiations seem to be becoming increasingly disorderly. Between no-confidence votes and no-deal preparations it’s easy to feel that you have no idea what’s happening.

Someone who can help to separate the market noise from the facts is Investec’s chief economist, Philip Shaw. We spoke to him to make some sense of the situation, and get an expert’s view on just how much impact Brexit might have on your investment plans. Here are his thoughts:

On the immediate Brexit outlook…

“The meaningful vote didn’t happen as planned last week, as Prime Minister Theresa May pulled it, realising that she was going to lose by a significant margin. The latest news is that the meaningful vote will take place during the week of 14 January.

“Now the Prime Minister must persuade the EU to make material changes to various parts of the agreement, and hope that it will be enough to get through parliament in the New Year.

“Whilst uncertainty is unhelpful, I view the risks of a no-deal situation to be relatively modest still and that any line of sight on an eventual agreement will help confidence and support the economy.”

On Britain’s post-Brexit economic prospects…

It is often forgotten that an agreed deal between the UK and the EU would result in a 21 month transitional period, where Britain’s relationship with the EU 27 member states would remain largely the same. That in itself would help support confidence in the short and medium term.

“And of course there are numerous other factors which are set to have an impact on the economic climate, one of those being fiscal policy. From the October Budget the economy is set to benefit from a considerable fiscal stimulus and amid all the noise about Brexit, that fundamental fact is being ignored.”

On Brexit’s significance globally…

“The further you move away from Britain and Ireland, the less significant Brexit is. So if you invest in larger UK stocks, those companies are of course much more dependent on global economic changes, rather than domestic policy changes.

“Particularly from the perspective of investing in equity markets, the issue with Brexit is overblown, given the global context one has to consider in assessing FTSE 100 stocks.”

On the value of sterling over the next 12 months…

It’s clear to me that if the pound is vulnerable, it would most likely be from a disorderly Brexit, and if that doesn’t come to pass then markets, I believe, should begin to buy the pound up.

“My baseline view is that the UK will get a deal agreed with the EU which will go through parliament, which will go through a transition period for close to two years and then the immediate fears about Brexit will be over.

“The central basis is for the pound to be at $1.40 against the dollar by the end of 2019. Admittedly there a lot of factors, including the type of Brexit we have and who is Prime Minister by the end of 2019. But fundamentally we would think, or hope, that in 12 months there is sufficient clarity on Britain’s relationship with the EU to enable the pound to reach a higher level.”

On the Bank of England’s recession warnings…

“With respect to the Bank of England view, it should be noted it is not a central forecast – what the Bank of England if trying to do is construct a worst-case scenario for what could go wrong, and look at the impact on the economy and, of course, banks.

“That, in my view, is entirely consistent with what it should be doing, which is ensuring the soundness of the financial system. If you don’t plan for the worst then you aren’t really doing your job.

On the risk of a no-deal Brexit…

“Hopefully parties are not that far away from agreeing a particular deal. In negotiations you typically only manage to get things sorted out at the last minute and I believe it is in no one’s interest for there to be a disruptive no-deal.

“I think that the looming deadline should help galvanise both parties, and the various institutions, in converging towards a settlement.

“Like many others, I feel that something will be sorted out. It could run until the last minute and it’s not impossible that we ask for an Article 50 extension in order to sort the various negotiations out.

On the opportunity for investors now…

Markets tend to overreact in times of uncertainty and, a lot of the time that is where you can get the most long term value. That doesn’t mean to say that people should be reckless, but uncertainties around Brexit could represent an opportunity in certain sectors and specific stocks.

“It’s important not to get drawn into the hourly and daily changes in the Brexit process. If you run a diversified portfolio, like we do at Click & Invest, then strong diversification helps to protect against events such as Brexit. Whether you see a positive or a negative market reaction, I believe that you should continue to invest around the world and over the long term you should make more money.”

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