The UK and the EU have agreed to continue to try and hammer out a trade deal ahead of the year-end deadline. The effect is to kick the Brexit can painfully down the road for another few days. While the country waits to see whether an agreement can be made at short notice, the markets have already demonstrated their aversion to no deal.
The outcome of these latest talks are far from certain and many have suggested a hard Brexit is the most likely outcome, but even a last-minute agreement will have a lasting effect on many areas of the UK economy. Investors have been shoring up their portfolios with physical gold each time the possibility of a no-deal Brexit is mooted, and this flight to safety will continue down to the wire.
A history of no-deal market gloom
Since the unexpected Brexit vote wiped trillions off global stocks in 2016, markets have largely fallen if a no-deal Brexit increased in likelihood, and recovered as no-deal concerns receded.
This time two years ago, the markets slumped on trade war fears and the increasing probability of Theresa May’s Brexit deal being voted down. A year later the initial market relief of a Conservative election victory was reversed just days later as the spectre of a no-deal exit became more likely.
The UK-stock exposed FTSE 250 fell 1.4% on December 17 after the government ruled out an extension to the transition period raising the chances of a no-deal exit. In August 2019, the FTSE 100 fell 1.7% in response to a cut in growth forecasts from the Bank of England. This was a clear warning of the fallout of a hard Brexit, compounded by global trade tensions between the US and China.
These market declines – and subsequent recoveries – give a glimpse of the potential market rout that could follow a final no-deal decision. Before the announcement of continued negotiations on Sunday, markets were braced for a plunging pound and falling stock prices if a hard Brexit was triggered.
Morgan Stanley warned that the FTSE 250 could lose up to 10% of its value if this outcome came to pass. The reprieve of continued negotiations will be short-lived. Any agreement needs to be made with enough time before the end of the year for EU countries to vote on any deal.
When the Brexit negotiations still had months, or years, to conclude, naysayers had warned of the effects of crashing out without a deal, including import and export disruptions, price spikes and currency devaluation. As the final hour approaches, these concerns have begun to crystallise. Brexit stockpiling has led to miles-long lorry queues at Calais in France, and UK supermarkets are stockpiling goods in anticipation of delays and shortages.
A hard Brexit will mean the UK is subject to duties and taxes previously waived which will invariably increase the price of goods and services. The longer organisations remain in limbo on the outcome of Brexit negotiations, the less time they will have to ensure they are prepared for the change. With just over two weeks to go, this indecision could be as damaging as a no-deal outcome.
Brexit was the most important UK financial news story until the COVID-19 pandemic sent shockwaves through the global economy. For most of this year, concerns about Brexit were entirely overshadowed by the disastrous effects of the pandemic.
Markets have swung to multi-year lows and enjoyed small incremental rises as lockdowns, infection rates and the social and economic fallout of the virus has been felt everywhere. The effect has been to mask the Brexit pathway until the very end, as the final deadline looms, and then is extended again. The approval of a vaccine has placated market watchers somewhat and they are now focused intently on the negotiations over the next few days.
Risks remain in deal scenario
The rhetoric from Brussels on Monday was slightly more upbeat than the previous week, and guarded comments about optimism are keeping market turmoil at bay. But it’s important to recognise that even a deal, at this late stage, will not bring about miraculous economic calm and prosperity. The brinkmanship that has dominated the negotiation process has left companies unsure of their regulatory environment, and with very little time to effect whatever outcome is agreed.
Meanwhile the jobs market has already been devastated by the pandemic, with major retailers failing and many small business under severe strain. Unemployment is expected to peak at 7.7% between April and June 2021 according to the Bank of England. Growth forecasts are muted, and the UK economy will need many years to recover, all the while having to forge a new path with its closest trading partner as well as countries further afield. Even if a deal is agreed at the eleventh hour, the investment climate remains precarious.
Protecting your assets and investments
Many investors have already taken to safe-haven assets in the wake of the Brexit vote, US election, trade war volatility, UK election uncertainty and of course the COVID-19 pandemic shutdowns and economic crisis. Each consecutive stress on sensitive global markets has urged more people to hedge their investments with physical gold. Gold is an asset that has a proven track record of riding out and often exceeding market shocks.
The day before the Brexit referendum, sterling-denominated gold was trading at £850, and this past week it has been trading between £1,350 and £1,400. The gains have coincided with repeated upheaval and uncertainty in the stock markets and global economic volatility.
The advantages of investing in physical gold are not limited to its safe-haven status. Since 2000 gold has been VAT-free to harmonise the tax treatment of gold with the rest of the EU. In addition, certain types of gold, including bullion coins like the Gold Britannia and Gold Sovereign are capital gains tax free because they are legal tender in the UK. Owning physical gold also removes counterparty risk from the investment equation, a fact which has become more pertinent considering the stresses on banks from the pandemic fallout.
A hard Brexit will inevitably hit the stock market and investors would be prudent to diversify their portfolio with safe-haven assets like physical gold to manage this risk. But even an agreement won’t solve all the UK’s economic problems, so the strategy is just as valid whether it’s a deal or no deal.