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Point of View

Divorce proceedings have begun.
The five emotional responses to Brexit.

By Matthew Brittain, Investment Analyst

So we’ve finally done it. Article 50 has been triggered and the process of untangling our 40 year relationship with the EU has begun. Since the UK voted 52% to 48% to leave the EU on 23 June last year emotions have been running high, and they are likely to continue in that vein until a new settlement is proposed in 2019. Just like any separation, we are very likely to experience several different stages of emotion. The question is – what might they look like and how could they affect us as investors?

Denial


In the immediate aftermath of the EU referendum vote, we did denial very well. Even those in the Leave camp, couldn’t quite believe the UK had voted in favor of exiting the EU. David Cameron’s swift exit from Number 10 and the short but sharp leadership election that followed, gave rise to the now ubiquitous phrase “Brexit means Brexit”. Whatever it really means, Theresa May’s appointment as Prime Minister helped cement and give direction to the UK’s overall approach – a clean cut divorce that will see us removed entirely from the rules of the EU.
 
Sterling, on the other hand, was never in denial. As it plummeted sharply in the immediate aftermath of the result, and then struggled to recover, investors were thankful that it cushioned other asset classes from the Brexit shock. Some commentators are now suggesting that sterling has bottomed out, and could start to make a recovery – just as we enter Brexit negotiations. Further denial? Time will tell.

Anger


On 20 March, when Theresa May confirmed that Article 50 would be triggered just over a week later, the EU reacted like a lover spurned. The immediate response from within the EU suggested that they wouldn’t be in a position to start talks until May or June at the earliest, and reiterated that the UK would have to work to the EU’s timetable and potentially foot a £50 billion bill.
 
This is the start of what could be a long, protracted and acrimonious separation. If headlines such as “EU tells UK-based airlines to move to Europe after Brexit, or risk losing major routes”* are anything to go by, we may well have to fasten our seatbelts. A bit like children in a divorce, British business could find itself at the centre of a tug of war, and we will be monitoring closely the effect of the changes on different sectors within industry.
 
Exacerbating the situation further, the Scottish Parliament has now voted in favor of holding a second independence referendum. While Theresa May has been quick to say “now is not the time”, pressure from Holyrood is an unwelcome distraction for the government and adds to investor uncertainty over the future of the UK as well as the type of deal it may end up with from the EU.

Compromise


By the middle of this year, we will have begun the bargaining stage. No-one expects this to be easy. As the ‘leaver’, it will be easy to hang on every word uttered by EU chief negotiator Michael Barnier and the mainstream press will play its part in shaping public perception around the success, or otherwise, of the negotiations. Both sides have committed not to punish the other during the divorce proceedings, but the only way this will be achieved is through negotiation and compromise.   
 
It is very tough to see who the eventual winners and losers will be in this complex process. In the interim period, UK companies that export their goods and services are in a sweet spot - they benefit from the weakness in sterling (making their products more globally competitive), while still operating under the existing attractive EU trade rules. We expect them to grow their profits, but uncertainty for their long-term prospects may cap their share-price gains.
 
Ultimately, we expect the UK to attract limited investment while the threat of shifting goalposts remains. The evolution of this will determine the long-term economic direction for the UK.
 
In Europe, we think the risks are less to do with Brexit and more to do with the unity and integrity of the remaining 27. You can read more about that here EUROPE: A Continental Conundrum.

Regret


For many people – even many of those who voted the leave the EU – the process of withdrawal will be met with regret. There will be times when we realise we are on our own again, and mourn for what we may have lost. Hopefully these feelings will be fleeting and there are a number of positives on the horizon, most notably the prospect of new trade deals, particularly with the US, India and Australia.
 
We believe the UK will ultimately reach an attractive deal with the EU. We are a large trading partner and our defense and intelligence services, the City of London and our diplomatic ties make us too valuable an asset to lose, even though that deal might come at a price.

Acceptance


Acceptance will come will come with a huge sigh of relief, but the timing is still anyone’s guess. While there will be a deal on the table in just two years time, it may simply mark the end of the beginning and further negotiating and a transitional arrangements might follow.
 
The UK needs to ensure it remains relevant by investing in its own economy. For example, we are a hub for technology start-ups (London alone is ranked #1 out of 60 European cities for tech start-ups**) and proper support from government could mean this type of key-sector growth will secure job creation and tax revenues in the coming decades.
 
Of course, this doesn’t mean we won’t still feel sad for what we’ve lost, but we will have learned to accept the reality of the situation. Who knows, maybe things will even be better.
 
 
*www.theguardian.com/politics/2017/mar/22/uk-based-airlines-told-to-move-to-europe-after-brexit-or-lose-major-routes
**http://www.techcityuk.com/investors/ 

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.