What a difference a comment makes!

Thursday, 9th August 2018 09:00 - by Shant

Over the weekend, we heard from none other than UK Trade Sec Liam Fox - that he believes the risks of a failure to reach an agreement with the EU on a trade deal are now 60% to 40%. As it stands, the uncertainty factor was ramped up again, and with less than a week passed since the BoE hiked rates, the GBP exchange rate has weakened again and we are once again looking at the prospect of higher inflation amid tepid growth. 

Great! As much as it is headache for the BoE, the governor (Mark Carney) was also quoted saying that the risk of a no deal outcome were uncomfortably high, and speculation from these official sources does not bode well for the negotiations which both sides would like to see concluded by the end of the year. 

Reports are that the deadline for an agreement will be stretched to the end of November, and no doubt talks are ongoing at this very moment with a view to finding a compromise on which to base a platform agreement.  The finer points of the post Brexit relationship will then be thrashed out within the transition period - we hope.  

In the meantime, non of this bodes well for domestic investment.  Now that we have reached crunch time in the talks, corporates will keep spending tight and we expect hiring to take a hit and this is likely to show up in the employment reports in the months ahead.   Coming up are the Q2 growth figures which will be released on Friday, and after a dismal first quarter, we are looking for better performance albeit with a bar not set particularly high given qoq GDP of 1.2%.  Consensus expectations are that growth comes in around 1.3%, though we see risks of a very modest overshoot due to solid consumption over Apr and May.  Thanks to World Cup fever and improved weather, the UK consumer was in a good mood again, but the Autumn blues are likely to make it slim pickings for retailers from hereon out.

There have been consistent worries over the high street and as UK householders are likely to tighten their belts amid the uncertainty, we expect to see non essential goods and services take a sizable hit over coming months.  The focal point of any break down in Brexit talks will not only be the perceived collapse in supply chains, but also warnings that companies dealing with Europe will be forced to relocate over to the continent and job insecurity will naturally rise.  The natural consequences of this have clear implications for all companies involved in leisure activities and products, so even the ardent of UK investors would be best served by sticking to the staples for now. 

Even here, investors will have to pick carefully.  AstraZeneca have reported a £40mln spend on extra research and testing centre inside of the EU, thereby double checking drugs destined for customers in Europe.  The drugs maker has gone as far as to say that it could not guarantee a supply of medicine to European customers, though is naturally making preparations for the worst case scenario as we expect most UK corporates will have been busy with since the referendum.  

Earlier in the year, the optimism on a soft Brexit was largely down to a no news is good news scenario, with talks some way down the line back then - but here we are now, down the line and in the thick of it and the nervousness in the market is heightened once again. It would be somewhat remiss of me to suggest that the panic is somewhat over-hyped through the media or otherwise, but this is a momentous event and one which it seems the public and investors limited confidence in a smooth break away.  

The government have played more than their part in what many already see as a fiasco.  Divisions in the Tory party make Theresa May's job tougher than it already is, with Brexiteers - I think it is fair to say - putting idealism before business.  Business fears are now coming to the fore and will only increase as we get closer to the deadlines set for the end of the year as well as the exit data itself in March next year.  

Defensive positioning is all one can really advocate at this stage, and as noted above, this is no mean feat in itself!

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.