As trade negotiations between the UK and European Union (EU) look set to go to the wire, investors in the region agree that in investment terms, the biggest impact would come from a short-term foreign exchange hit. Key funds and sectors are braced for a nerve-jangling end to negotiations.
With three major obstacles still in the way of a post-exit trade agreement - fair competition rules, or the so-called 'level playing field', fisheries and governance - at the time of writing, Prime Minister Boris Johnson was en route to Brussels to meet with European Commission President Ursula von der Leyen for final stage crunch talks.
The fishing trade has captured most of the headlines as a particularly emotive sector, despite comprising just 0.1% of the UK and less than 1% of the EU's respective GDPs. Without a trade deal, Defra has suggested tariffs on fish (and fish products) of up to 25%.
Furthermore, the ongoing wrangle puts French President Emmanuel Macron well placed to re-engage his electorate following a slip in approval ratings, as he stands up to the British; all those 'sovereign waters' being at stake.
Race against time
Another area braced for a painful post-exit scenario should no deal materialise is the German automotive sector. In recent weeks, UK and EU leaders across the auto space have joined forces to lobby for a deal, otherwise facing tariffs of 10% on cars and up to 22% on vans and trucks, according to trade association, the Society of Motor Manufacturers and Traders (SMMT).
A number of organisations representing vehicle and part makers across the EU - a sector employing 14.6 million people - such as the European Automobile Manufacturers Association and the European Association of Automotive Suppliers, along with 22 national associations including the SMMT have warned no deal could result in roughly €110bn of trade losses up to 2025, on top of the €100bn of lost production already suffered this year through the coronavirus pandemic.
Broadly speaking, as Will McIntosh-Whyte, portfolio manager at Rathbone Investment Management, said succinctly: "Both sides need a deal because in the short term, we've already got massive pain, given what's happening right now with this current pandemic. The economies are under significant pressure and they do not need another hit from no deal."
He thinks they will manage an agreement, but it will likely be at the 11th hour.
"It is not a positive that the UK is leaving -- for either side. Much longer term, I should think the UK will eventually be OK but it also will depend slightly on what happens in the next few weeks, as we are pretty confident this will be the usual last minute 'going to the wire' negotiations, but that things will get fixed."
In light of that, the manager, who runs the £1.96bn range alongside head of multi-asset David Coombs, has hedged much of its overseas currency exposure in the portfolios.
"We have decreased our overseas currency exposure through hedging - 70% of our dollars and the majority of our euros. At the moment, sterling looks cheap versus other currencies and there appears to be a trigger for sterling to re-rate in the short term if there is a deal.
"It is important to protect the portfolio because, clearly, if you own lots of euros and dollars and sterling goes higher, it can be pretty painful."
An ill headwind
While certain sectors are clearly more exposed to 'the Brexit effect' than others, the timeframe is crucial.
The Allianz Global Investors' £220m Continental European fund managers are long-term, quality growth investors, who accept that Brexit will cause some short-term headwinds if it lifts sectors to which they are underweight.
Marcus Morris-Eyton, portfolio manager alongside Thorsten Winkelmann, said: "We invest with a long-term view but if you do see a Brexit deal, that might - in the very, very short term - lead to a recovery in certain sectors, such as the banking sector, which has been depressed, partly as a result of Brexit.
"That might create some short-term relative headwinds for us but long term, it absolutely does not change our thinking on those sectors."
Rather, some of the short-term effects of a deal/no-deal situation might come down to a currency play. In the UK, which makes up just 2% of the fund, Morris-Eyton favours the "more interesting" mid-caps that boast strong competitive positioning, naming Howden Joinery, Rightmove and Auto Trader among their preferences.
However, with their wholly domestic focus, these companies would be immune to any shifts in sterling.
Where they might feel an impact is in names like Kingspan or Reckitt Benckiser, which have benefited from a weak pound in terms of the "translation impact" of their reported earnings, and might feel some short-term pain from a strengthening pound, should a deal be agreed.
Elsewhere, the fund invests largely over a five-year timeframe and seeks out attractive structural growth companies based in Europe. But as many of those companies have grown from market-leading positions in their sectors or sub-sectors, they have grown to now be exporting that success globally.
"As various industries have become more global, these companies that might have been European leaders are now becoming global leaders," he added.
As the larger the company, the less the Brexit effect is felt, and believing it to be "dangerous" to try and construct a portfolio based on predicted currency moves, he said their portfolio should remain fairly unaffected by whatever agreement is, or is not, reached in the coming days.
Investors in limbo
James Milne, co-manager of the £240m Crux European and £1.1bn European Special Situations funds alongside Richard Pease, agrees, adding any movements for their investors will be down to FX.
"Essentially for our investors, the biggest move is if we have a good or a bad Brexit and then whether sterling goes up or down quite a few percent," he said.
Because they typically invest in quite global companies or in fairly niche, domestic names, he does not have too much sensitivity to Brexit.
In addition, he said any of their holdings exporting to the UK had already taken the big currency hits when sterling fell off a cliff following the referendum. He gives the example of two chemical distribution companies: German Brenntag and Dutch-headquartered IMCD.
Rather more noticeable, he said, is the overarching sense of limbo that has stymied companies for more than four years now.
Milne explained: "What's happened in the past few years is that people have just not invested. If you don't know what the rules are, then you don't want to start building.
"There are lots of companies that would benefit when something eventually gets signed, then they can work out their plans, and we can work out whether or not to invest."
He gave one example of a potential indirect beneficiary as Trelleborg, a Swedish engineering company based in Skåne that make polymer seals for industrial applications within heavy machinery, such as the hydraulics on JCB diggers, for example.
Is Brexit alone to blame?
Whether this year concludes with a deal or not, either outcome will provide a degree of certainty that has been lacking for some time.
Milne added: "It provides some certainty one way or another, which can help people decide whether to build that factory and buy those machines, or not."
Interestingly, managers from both sides of the Channel have argued their bearish views are rooted in reasons that long pre-date Brexit.
AGI's Morris-Eyton said the UK has structurally underperformed for many reasons for "quite a long period of time", citing the structural challenges facing its primary constituent sectors.
He said: "People are very willing to blame Brexit. Brexit is a contributing factor, but the earnings performance of the FTSE 100 has been weak for much longer than Brexit has been around."
Conversely, McIntosh-Whyte said while they try to not build their positions on a regional basis, they have been bearish on the European domestic economy for a while.
"Europe overall has got big structural headwinds," he said.
"The banking system isn't as strong as other regions, which is a really important building block of economic growth and I don't think that's likely to change."
He said the negative or zero interest rate "trap" that Europe appeared to have been caught in was very difficult to get out of, which has led to many companies surviving under false pretences, only avoiding collapse because of lower and negative rates.
"Part of that's because [Europe] did not have that 'cleansing' following the financial crisis… you have low growth, disinflation and structural issues around the construct of the EU itself."
Milne ponders a poll of anyone voting in the referendum, as to whether they got what they wished for, seeing it dragged out for more than four years.
"It would be nice to have a line drawn. I genuinely doubt anyone realised in 2016 that we would still be basically nowhere, four years later. I don't think anyone expected it to be this drawn out, and this difficult."
A version of this article was first published by our sister title Investment Week