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The UK’s four-year wrangling with the EU for a Brexit “trade deal” has finally ended. At 11pm on the 31st of December 2020, the “transition period” – during which the EU’s rules for trade, travel and business temporarily still applied to the UK – ended. From the 1st of January 2021 the relationship between the UK and EU will be governed primarily by the formal Brexit deal that has been agreed.
This brings a host of changes. For British travellers, it currently means that a visa will be needed to stay in the EU for more than 90 days in a 180-day period. There could be additional delays at border crossings as lorries fill out more paperwork. Yet many investors are also wondering how this new era for the UK may impact their portfolio. Will “Brexit Britain” turn out to be a disaster for the economy and its companies, or could certain sectors – e.g. robotics, sustainable farming and biotech – now boom since they are free from EU rules?
Keeping short-term fluctuations in perspective
First of all, some good news. The Brexit deal agreed in the final days of 2020 means that free trade in goods – valued at £668bn in 2019 – can largely continue between the UK and EU. This tariff-free agreement will be a particular relief for sectors such as automobile manufacturing (and their investors), where “just in time” cross-border supply chains are integral to the business model. This avoids the “no-deal Brexit” scenario which many analysts predicted could have led to economic damage, such as the OBR which had forecasted a £40bn hit to the UK’s economic output in 2021 as well as 300,000 job losses.
The economic outlook for the year ahead is now more optimistic – although still overshadowed by the impact of COVID-19. Over the longer term, however, it is difficult to predict how Brexit will affect stock markets. On the one hand, finance remains a core UK export and beneficiary of foreign direct investment (FDI). The UK-EU free trade deal does not cover financial services, and the impact on the UK economy could be severe if the EU suddenly disallows UK firms from doing business within its borders. On the other hand, prominent think tanks such as the CEBR (Centre for Economic and Business Research) predict that the UK will surpass the EU in terms of economic growth over the next 15 years – possibly growing 25% larger than France. This is particularly due to expectations that UK tech could see a big rise as sectors such as big data, fintech and artificial intelligence (AI) develop.
This uncertainty should pull investors back to some essential, time-honoured principles which should already be at the heart of their portfolio strategies. First, appropriate diversification is key to successful investing. Spreading your risk across different markets, sectors and asset types can mitigate short-term volatility and expose your portfolio to more investment opportunities. Second, a long-term perspective is also crucial to a viable wealth growth strategy. Markets and indices may fluctuate in the short-term, yet over 5-10 years many of them can be reasonably expected to grow. Brexit does not change this fundamental principle – that time in the markets beats trying to “time the market”.
The Brexit trade deal negotiations are now over, but 2021 is unlikely to see an end to disputes between the UK and EU over their relationship. Investors should keep a watchful eye but not stress about how this affects their long-term strategy.
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