Business & Investment

Brexit: Brexit’s trade deal is a relief, but the UK market is hurt

Tommy Wilkes

London: Trade Agreement with Britain European Union It removes the fear of a four-and-a-half-year-old crash from a block without a trade deal, but it will take years for the UK financial markets to lose the scars caused by Brexit.

“No transaction Brexit“Risk has weighed on UK growth and investment prospects since June 2016, when citizens resolved to break relationships with the country’s largest financial services client, which accounts for $ 1 trillion in bilateral commerce annually. I did.

Therefore, trading on Thursday, 7 days before the deadline, is definitely a relief.Analysts are encouraging clients to snap up Undervalued UK stocks, Has shown the worst performance in the major markets since 2016 and states that many are buying pound sterling. This is a high of nearly two and a half years, exceeding $ 1.36.

But those who want the deal to allow UK assets to catch up with high-flying overseas markets may be disappointed.

Due to the minimal nature of the agreement, the UK is far more separated from the EU than was thought in 2016. Further negotiations are inevitable in 2021 to materialize the agreement.

That all means that the discounts that have plagued UK assets since 2016 will not disappear soon.

“Brexit means the UK is likely to lose some of its brilliance,” said Seema Shah, Brexit chief strategist. Major global investors..

The news could give some traction to the UK market, but she said it couldn’t protect the economy from the long-term scars caused by the combination of Brexit and Covid-19.

“Once excluded from the world’s largest single market region, we will see the flow of jobs, people and capital gradually move away from the UK in search of a destination that accepts globalization instead,” Shah said. He added.

Illustrating discounts, UK equities have been underperforming since 2016, lagging behind the global recovery since March, which pushed the rival index to a record high.

The UK currency is about 20 percent below its long-term fair value. Few people expect a full recovery in the short term.

Poor performance is primarily due to foreign investors dumping UK assets. Financial data provider eVestment estimates that European and US-based investors have withdrawn more money than they added to UK equities almost every quarter from the referendum to the third quarter of 2020.

And the size is UK market Caroline Simmons, UK CIO of UBS Global Wealth Management, said the percentage of the global index has shrunk from 10% before the referendum to 4%, eliminating the need for foreign investors to hold that much UK stock. ..

UK stocks may work well against backgrounds where other markets look expensive-British stocks, according to Simmons, compare to the global market for the usual 10% discount It is trading at a 30% discount.

But she doesn’t expect them to recover completely.

“I think some of the Brexit discounts will be gone, but will they be gone altogether? The UK’s cumulative GDP decline as a result of Brexit is still quite significant,” she said.

Covid-19 Compound Brexit

As a further shadow of the outlook, the UK economy, already weakened by the uncertainty of Brexit, suffered the worst of the major nations from the Covid-19 pandemic in the second quarter of 2020. Struck the worst recession in 300 years.

As a result, the government was forced to raise its debt to peacetime records.

Economic recovery is complicated by weak “real store” foreign direct investment. According to official data, the net value of foreign direct investment (FDI) in the UK fell to £ 49.3 billion in 2018, reaching a quarter of 2016.

Consultant EY estimates that this year there will be 30% to 45% fewer FDI projects than in 2019, primarily due to pandemics.

Brexit’s deal “can unblock the backlog of international investments that have been waiting for some outcome before financial institutions start investing in UK plc again,” said Hinesh Patel, portfolio manager at Quilter Investors. It was.

Others are not optimistic and say that a watered-down relationship with Brussels will cause permanent damage.

“There’s a bit of short-term and long-term talk here,” said Andrew Sheets, head of cross-asset strategy at Morgan Stanley, before the deal was announced.

Eliminating the risk of no transactions raises average asset prices, but “the underlying economic challenges remain unsolved … facing negative shocks to services, which make up the majority of the UK economy,” Sheets said. “.

Brexit: Brexit’s trade deal is a relief, but the UK market is hurt Brexit: Brexit’s trade deal is a relief, but the UK market is hurt

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