Reflecting on the year ahead, it is impossible not to talk about Brexit – especially today when Theresa May heads to Brussels for a crunch-time meeting with Jean Claude Junker. Will there be more clarity around the divorce bill and how to solve the Irish border issue? Brexit throws up lots of questions about the economic, political and social future of the UK’s relationship with the rest of the world and markets await further clarity with anticipation.
For investors, dealing with such uncertainty means identifying the pertinent facts and assessing them in the context of asset price behaviour – what’s ‘priced-in’. In this respect, the important economic question on Brexit is not ‘what does the future trade agreement look like?’ The pertinent question is, ‘how different will it be from what we are used to?’ This is both an impossible and an easy question to answer.
Impossible in that we won’t know the specifics for a long while yet – and even when we do it will be very difficult to judge the impact. Easy in that we can answer in the way we would approach any other uncertainty: by looking for evidence and judging probabilities based on observable facts.
UK administrations since the 1980s have consistently favoured participating in global trade and, albeit by varying degrees, in the global market for labour and capital. Despite the popular vote to leave the EU, there is no evidence to suggest it is part of an ideological shift away from open markets in favour of closed ones. In a broad sense, this suggests that, whatever the outcome of the negotiations with the EU – and indeed in the subsequent trade talks with everybody else – the ultimate differences are more likely to be ones of emphasis and detail rather than of regime. And in that sense, the easy answer to our ‘pertinent question’ is, for the aggregate economy, ‘probably not all that different’.
Of course, we mustn’t forget how little we can actually know. Rather than take a strong view – and investment position – either way, contingent on a particular outcome, we should continue to look for opportunities where market price behaviour exhibits a strong ‘Brexit effect’. This way, we can seek to exploit the market’s craving for certainty while trying to resist our own, which is something I will be focusing on next year.
Steven Andrew is a multi-asset fund manager at M&G Investments