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What Theresa May’s Brexit speech means for markets

18 January 2017

FE Trustnet considers what Theresa May’s speech reveals about Brexit negotiations and gathers some of the reaction from the investment industry.

By Rob Langston,

News editor, FE Trustnet

UK prime minister Theresa May ended months of speculation this week to confirm that the government would seek a ‘hard Brexit’ from the EU, following last year’s decision to leave the trading bloc.

Underlining Brexit policy objectives under the tagline of “a truly Global Britain”, May announced that the country will seek a clean break with EU institutions once it had left.

According to May, negotiators would not seek “partial” or “associate” membership “or anything that leaves us half-in, half-out” and would not seek to emulate models enjoyed by other countries such as Norway, Switzerland or Canada.

May ruled out any membership of the European single market following the Brexit process, signalling a bespoke free trade agreement with the trading bloc as well as the end to significant contributions to the EU budget.

The prime minister claimed negotiators would “seek to avoid a disruptive cliff edge” and promised that Britain wanted to “remain a good friend and neighbour to Europe”.

However, she warned that any kind of punitive deal for Britain and other potential countries exiting the EU would be an “act of calamitous self-harm”, adding that “no deal for Britain is better than a bad deal for Britain”.

The threat came with the potential for setting low tax rates, establishing new barriers trade and jeopardising UK investments by EU companies, as well as restricting access to the City of London.

Yet, despite the uncompromising tone of the speech, sterling rallied against the dollar confounding earlier predictions that it would fall against any suggestion of a hard Brexit.

Performance of sterling vs US dollar over 1yr

 
Source: FE Analytics

Bryn Jones, head of fixed income at Rathbones, said: “One significant implication of the referendum result has been a fall in sterling. This is starting to filter through into higher prices from weaker sterling, creating higher import costs."


“In turn, this is likely to squeeze consumers and margins in Q2 of this year. As a result, it looks like the government is playing cat and mouse, as a harder line may cause sterling to fall further, creating higher inflation still and thus great financial instability.”

He added: “I suspect we will continue to ebb and flow on FX and rates moves all year as we hear more on this subject.”

While the speech, along with the news of a surge in inflation earlier in the day, had provided some uplift for sterling, UK equity indices dipped slightly.

Performance of FTSE 100 vs FTSE 250 over 1yr

 
Source: FE Analytics

“Doubtless there will be compromise along the way,” said Eric Moore, manager of the Miton Income fund. “But, despite the talk of ‘providing certainty’, this is still just the start of a process that is going to keep markets guessing for many months ahead.”

Moore said quoted British companies were “unlikely to change their plans or behaviour as a result of what they heard”, adding “they will be hoping that the subsequent devilling-in-the-detail will not be too dampening for aggregate demand”.

Indeed, others have suggested that despite May making certainty and clarity one of her key objectives during Brexit negotiations, several unknowns remained.

“May’s comments on any transitional agreement were vague; however, the broad thrust of her argument was for a phasing out of EU membership, rather than a separately negotiated interim agreement,” said the multi-asset team at Henderson Global Investors.

“In our eyes, this outcome gives less security to the corporate sector and somewhat weakens the government’s negotiating position.”

The team noted that the next move in negotiations would be in the hands of European negotiators, who could dampen expectations.

“Furthermore, now greater clarity has been afforded to the corporate sector, the potential for more negative headlines on office relocations/staffing changes will likely increase,” the Henderson team said.


“The enormity of the task facing the UK government should not be underestimated. With the French and German elections dominating political attention on the continent for the next six months and an estimated further six months required to ratify any eventual deal, the UK has around 12 months to negotiate the most significant trade deal of the last 50 years.

“Moreover, the negotiations are likely to take place against a backdrop of rising inflation and negative real wage growth. As a result, we remain cautious on the outlook for sterling and the UK consumer.”

Kames Capital chief investment officer Stephen Jones says government and Bank of England policy is likely to focus on growing the UK economy in the coming months, as it presents a stronger image ahead of negotiations.

“The UK needs to be seen to be a growing and attractive economy for Europe and the rest of the world to engage with,” he said.

“The skills here, the unquestioned rule of law, language, financial transparency and effective capital markets to name but a few aspects of the UK’s attributes for business will in our view be supported aggressively through the period of negotiation and re-orientation.”

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