With Brexit negotiations almost at a close, Britain will start the new year without the EU. All eyes are now on how the UK’s economy will bounce back depending on deal or no deal.
The EU referendum result back in 2016 was far from what we expected with drawn out negotiations finally coming to the end just 4 years later… Although the pandemic has made Brexit news by setting back the trade deal, investors should now think about the uncertainty of the pandemic and Brexit combined.
A no-deal Brexit at the end of 2020 would hit the UK economy hard with a slow recovery of 4.2% GDP in 2021 as best case scenario. With economic issues in the short-term, no trade deal would impact trade, employment rates and productivity over the long-term. Whereas a good agreement between the UK and EU would hugely improve the economic outlook and get Britain out of this slump.
The UK stock market has fallen firmly behind other key markets around the world. The FTSE 100 Index has been on a rollercoaster tackling Brexit updates and the coronavirus pandemic. The index is largely made up of oil companies and considering the low prices this year due to worldwide lockdown, no wonder the FTSE 100 has had a bad year. There is also a distinct lack of tech companies in the index making it an unattractive investment compared to NASDAQ’s tech index. Furthermore, British companies have held back on dividends leading investors to different economies.
Investors are hoping for the recovery of the UK economy to set off 2021 with a bang. UBS estimates a 13% increase in international investors in UK markets leading from the EU trade deal. After a long stint of poor performance, UK stocks are turning around. 2021 forecasts a dividend yield of 3.9% and an estimated 32% growth in earnings per share under a bullish outllook. However potential COVID lockdowns and no-deal Brexit can see investors retreating with uncertainty.
Supposedly 95% of the UK EU deal has been secured with both sides content on key topics such as social security. However there is still disagreement in a few areas, including fishing, which has been a sensitive point of discussion for a long time. Brexit negotiations are sure to test your nerves with high turbulence reflected in the markets. However, this would be the worst time to sell as you solidify your losses and miss out on any potential recovery in the market. Although there are no guarantees that markets will improve.
Sterling has been swinging ever since the Brexit referendum, depending on what exit deal looked most likely on the cards. A weaker pound is great for UKs multinational companies as profits are boosted when money changes to sterling. But bear in mind if the pound strengthens the reverse will happen! Under a no-deal the Bank of America forecasts a GBP/USD of 1.1000 and GBP/EUR of 1.0525.
Brexit isn’t the only factor affecting stock prices. Large events like new lockdowns, the US presidential election or the announcement of Covid vaccines complicate the outlook. However, taking a global approach and diversifying your investment portfolio to minimise shocks to UK stock markets will provide the most security under the uncertainty of Brexit. Don’t be put off investing in UK stocks, although some may suffer, others may thrive. Keep upto date with the latest news with BullBear.
Disclaimer: This article is written for entertainment purposes only. Seek professional advice if you are unsure about investing.