Investment Tips
31/12/2020
Franklin Templeton Thoughts: Brexit Deal Finally Struck as 2020 Comes to a Close

Four years after the United Kingdom elected to leave the European Union (EU), a Brexit deal was finally struck, ironing out outstanding disputes on trade and other issues between the two parties. The agreement outlines rules for the new relationship between the United Kingdom and EU in areas including fishing rights and border crossings for both goods and people.

As the deal was struck on Christmas Eve, UK Prime Minister Boris Johnson communicated it as a present for the country. While not perfect, we certainly think it’s a reasonable deal and takes away that cliff edge of the United Kingdom exiting without a trading relationship for goods. There are nuances and other areas still to negotiate, but the major issue surrounding trade—EU fishing rights to British waters—is now behind us.

While fishing isn’t a large contributor to the UK’s gross domestic product (GDP), it is symbolic, and became a political issue. The new deal outlines a five-and-a-half year transition period wherein 25% of EU fishing rights off UK waters will be transferred to the UK’s fleet—after that, there will be annual discussions to determine quotas.

While fishing rights are still subject to future negotiations, financial markets reacted positively to the news of the deal—the British pound strengthened, and the UK stock market rallied amid the removal of uncertainty. It’s also good news for UK corporate credit, because it removes a destabilising issue. UK gilts haven’t sold off as much as we might have expected, but that’s because growth is expected to be stunted for some time due to COVID-19.

It’s important to note this deal is only for goods, not services. For services, there will be an equivalence test and each side individually will determine if regulation in the other jurisdiction meets their standards. So, there is still room for adjustments on the services aspect.

While the Brexit deal is the most significant, the United Kingdom has signed an impressive number of trade deals with other individual countries as well—and more are likely in coming months. Going forward, we’ll likely see the UK look at other policy areas where it will want to diverge from Europe.

That all said, there are other concerns that dampen the short-term market outlook—namely the pandemic. COVID-19 hit the UK economy the hardest of the G10 economies—GDP shrank 20% in the second quarter of 2020. Even with a vaccine coming to market, we’ve seen a resurgence in cases, so the lockdowns are not over yet. More restrictions will further reduce UK economic output in the near term.

While the UK’s Brexit saga has largely come to a close, there are still internal issues within the country (including areas of concern for Northern Ireland and Scotland), and still work to be done to get the economy on firmer footing.

 



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