On 24 December 2020, UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed on a post-Brexit trade deal, ending a saga that triggered widespread concern from investors for over four years. Whilst the Brexit deal helps investor sentiment and businesses trying to plan for the future, we don’t think it was necessarily required for the regions’ economies or stock markets to do fine in 2021. In this article, we’ll discuss the Brexit deal, some immediate effects and what Fisher Investments UK thinks it means for equities.
The Brexit deal held little market-moving surprise power
The biggest hurdle in Brexit talks late last year seemed to be fishing rights, which likely have minimal impact on equities. The final agreement determined EU fishing boats can access UK waters for five and a half years but the value of their catch must fall by 25% over that period.i Beyond fishing rights, the agreement offers little that wasn’t already expected.
The Brexit deal puts the UK outside the EU’s customs union, giving the UK freedom to diverge from EU regulatory standards. As a result, there will be border checks on goods crossing the English Channel or Irish Sea. The border between Ireland and Northern Ireland remains unfettered, consistent with 1998’s Good Friday Agreement. However, UK-based services firms (including banks) need to have a physical EU presence to ensure market access. Since this was widely expected, many UK firms had already established footholds in EU-member countries over the past few years.
After the deal went into effect, some businesses experienced short-term issues as they adapted, which was largely expected. When France closed their UK border due to COVID concerns in December, many people saw the backlogs at ports as a precursor to eventual Brexit-related mayhem caused by new paperwork requirements for truck drivers. However, initial post-Brexit truck shipping went much smoother than many expected, suggesting expectations for the Brexit outcome were likely overly dour.
Others feared euro-denominated stock trading would leave UK stock exchanges, which did come true to an extent. While the move is a slight hit, stock trading isn’t a huge source of revenue and UK Financials’ equities fared fine post-Brexit, which leads us to believe this small negative was probably already priced into equities.
What the deal does and doesn’t mean for UK and EU equities
Whilst short-term stock market movements can happen for any or no reason at all, Fisher Investments UK finds it noteworthy that UK equities jumped 5.79% in the first week of 2021 (far outpacing the MSCI World’s 2.39% rise) after the much-feared post-Brexit chaos failed to materialise.ii We believe this partly reflects a potential post-Brexit improvement to investor sentiment, but we don’t think the deal was necessary for the UK and EU economies or stock markets to improve in 2021. Any Brexit deal (or lack of one) was sure to affect UK and EU businesses somehow, but we believe many of the fears were overblown and already priced into equities.
We believe equities move most on the difference between reality and expectations. When investors’ expectations are low, say, during a four-and-a-half-year period of ongoing Brexit-related uncertainty, reality doesn’t have to be much better than feared to surprise to the upside—potentially boosting stock prices.
Investors have feared a no-deal Brexit scenario causing major UK-EU trade disruptions since the June 2016 vote passed. However, UK-EU trade wasn’t going to come to a complete halt. Last spring, the UK government unveiled the UK Global Tariff (UKGT) that showed what a Brexit on World Trade Organization (WTO) terms would look like—which may have allowed for broadly freer trade than existed for the UK previously. The UKGT would have applied to UK-EU trade in a no-deal scenario, and, whilst that would have represented some new trade barriers, they weren’t high.
A no-deal scenario may have created disruptions for some businesses, but Fisher Investments UK didn’t believe those disruptions would be disastrous for equities. Considering no one expected perfection in trade following Brexit, anything short of disaster would have likely surprised to the upside.
Just as we didn’t believe a Brexit deal was necessary for both sides’ economies or stock markets to do fine post-Brexit, we don’t view the Brexit deal as some enormous positive or super-bullish catalyst for equities.
But the deal gave businesses clarity, which is definitely a positive as they plan for the future. One major drag on UK businesses during this saga has been the immense uncertainty and planning for many different possible scenarios. Clarity—whether from a deal or a no-deal outcome—allowed businesses to identify and start executing optimal post-Brexit strategies.
Moving forward, businesses will continue adapting and finding new ways to thrive and profit. Fisher Investments UK believes this reality is what equities are likely pricing in now—more so than any immediate short-term disruptions. Equities don’t seem to be pricing in any huge Brexit-related negatives on the horizon—and trusting their judgement and forward-looking nature is often a wise move.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
i Source: Council on Foreign Relations, as of 21/01/2021. https://www.cfr.org/in-brief/whats-eu-uk-brexit-deal
ii Source: FactSet, as of 11/02/2021. MSCI UK Total Return Index and MSCI World Total Return Index, gross, 31/12/2020–08/01/2021. Presented in US dollars.