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Investors encouraged to prepare for a ‘No’ deal Brexit

There is too much at stake and too much potential disruption for both parties for the UK and the EU to risk failing to reach a deal on trade ahead of the UK’s exit in March. But investors should still prepare for the worst and be mindful of the consequences of a ‘No’ deal, an experienced investment director has warned.

Chris Davies

Chris Davies, investment director at Estate Capital, a firm of chartered financial advisers in South Wales that manages more than £200 million in its own investment portfolios, said that a ‘No’ deal will have serious implications for the economy.

“We will of course be monitoring the situation,” he said. “If there is no deal and a hard Brexit is the result, market confidence in the UK will be affected; sterling will take a further hard hit and initially so will the stock market. But remember, after the EU Referendum a falling pound aided a significant stock market rally. This time however the issues of market maturity and global slowdown may not be so kind as to support such a rebound.”

He adds that, as far as investors are concerned, while the US stock market has grown significantly this year, the UK, EU and emerging markets have fared less well. The high US dollar valuation and tax incentives are supporting a US rally but may well come under threat of correction next year as these tax incentives were off.

“As far as the UK is concerned the stock market is hoping for a soft Brexit where business can continue much as it currently does,” he said.

For this reason and many others, he stresses that the scale of the problems a ‘No’ deal would cause means it would not be in the interests of either the UK or the EU for this to happen.

“There would be no agreement on the £40 billion divorce payment, no agreement over the rights of UK citizens in the EU and no agreement over the Irish border,” he said.

He notes that while hard-line Brexiteers argue that trading on World Trade Organisation (WTO) rules and keeping the UK borders open to trade will be sufficient to resolve the problems over the free movement of goods, this would not work in practice.

“A unilateral declaration of Britain being a free trade nation without agreed reciprocal agreements would not work as the EU still have to charge tariffs on UK imports due to WTO rules on non-discrimination. EU goods will be cheaper in the UK and British goods more expensive in the EU. If we were to close or restrict our borders in order to protect UK farming, even for a short period, would cause food shortages as 50% of our food comes from overseas with 40% coming from the EU,” he explains.

As an example, he notes that the UK imports 10,000 containers of food from the EU each day. “If we left with No deal, frictionless trade based upon common regulations and standards would end and be replaced by a regime of inspection and certification that we are clearly not currently equipped to carry out. Export and import delays would be considerable, partially affecting fresh food. European supply chain efficiency is based upon frictionless trade that allows ‘just in time’ delivery.
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“The UK would fall out of pan EU regulation over air safety, medicines, vehicle safety and food standards to name a few, without time to create regulations of our own that other countries will immediately recognise.”

Both sides are fully aware of the challenges this would cause, he says.

“The sheer scale of these issues alone makes it obvious that such a scenario needs to be avoided and for this reason crashing out of the EU without a deal remains highly unlikely. It is simply not in anyone’s interest. We expect that after 11th hour brinkmanship we will arrive at a negotiated settlement between the UK and EU. The deal may not satisfy either extremes of the Brexit divide but would establish a customs relationship with the EU and one that allows the UK to negotiate free trade agreements across the world.”

He adds that, as the world’s second largest services exporter particularly in areas such as education, life sciences, technology and financial services it is not surprising that 30% of UK GDP comes from exports. The UK currently sells £620bn of good or services to other countries each year. This could be further increased with new markets opening, he says.

He concludes: “When we read about the worst scenarios of planes not taking off, freight lorries parked for 30 miles on the M20 in Kent, or that stores run out of food – it is worth remembering that the UK imported £270bn of goods from the EU last year while we exported £164bn. Of the £270bn imports, £70bn was from Germany alone, which is about the same as Germany exports to both the USA and China combined. German business will not want Angela Merkel lose their best customer.”

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