WeeklyWatch – Brexit date comes…and goes

Monday 1st April 2019

Stock Take

Looking beyond 29th March

Last week saw the infamous Brexit date arrive…and pass…without any success in agreeing a deal – thankfully, the Royal Mint had the sense to hold off on stamping its commemorative coins with ‘29 March 2019’. As for the sterling coins already in circulation, their value unsurprisingly proved rather unpredictable over the course of the week, rising and falling with the respective successes and failures of attempts to solve the current impassé.

Yet, for some investors, placing the blame on allegedly ‘feckless’ MPs for the stalemate risks missing the point. Howard Marks of Oaktree Capital Management, Co-manager of the St. James’s Place International Corporate Bond fund, commented: “If Brexit was demonstrably advantageous economically, I would have thought they’d have found out a way to do it in the last 24 months. But all they have done is said what they don’t like. Nobody has found an approach that the majority of legislators liked – and maybe there isn’t one. It’s not one of these deals where people vote for it and the implementation is smooth and easy because it makes so much sense.”

Sterling reacts

The pound took a hit when the DUP made clear that it wouldn’t back the PM’s deal at the third time of asking, and again when Theresa May lost a third vote on her deal (albeit only the first part of it) – despite her promise to resign should the deal pass. In the face of this volatility, both times the pound soon started to recover, in the hope that the second round of indicative votes, due today (Monday), would initiate some progress. This week may prove decisive for both Brexit and sterling, not least given the growing rupture in the Cabinet.

Anatole Kaletsky, Co-chairman and Chief Economist at Gavekal Research, said: “By removing the hard deadline for Brexit negotiations, the EU has avoided the disaster of a 2008-style sudden stop in business with its second-largest trading partner. The threat was not a deal on WTO terms. It was the lack of a transition period – a sudden stop. That is the qualitative difference between no-deal and all the other options. But in my view, the probability of a no-deal outcome is now zero, which is good for UK assets – just not for gilts.”

It is worth remembering, then, that UK shares have seen almost continuous investor outflows since that day in June 2016 – this could yet reverse. It’s also significant that the FTSE 100 ended up for the week, and that January GDP showed a robust increase from weak December levels. While Brexit developments undoubtedly made their presence felt on markets last week, both in the UK and across Europe, other themes may have mattered more at a global level.

Outside the UK

Meanwhile, the US and China both reported positive economic news this year. Initial US jobless claims are now at multi-year lows for this season, despite weak consumer spending trends, while China has been enjoying a golden period of capital inflows this year. Regarding US-China relations, by Larry Kudlow, Donald Trump’s Chief Economic Adviser, told reporters that trade negotiations could stretch out for months, indicating less urgency to impose sanctions and perhaps a new keenness to reach a deal, too. Markets responded positively on Friday, both in equities and US government bonds, plus the S&P 500 and Shanghai Composite indices both ended up for the week.

Nigel Ridge of BlackRock, Manager of the St. James’s Place UK Absolute Return fund, commented: “Whether we get a sanctions resolution in the US–China dispute is a key theme for 2019. The rhetoric has been more constructive of late and has been a contributing factor to US equities going up this year. Other key themes for the year are the impact of Brexit on the UK stock market and the outlook for interest rate rises in the US. It could be a tough year and I’m convinced that there will be volatility.”

Wealth Check

Despite what happened to the Brexit date, the upcoming end of the tax year on Friday won’t be moving. The good news is that there is still a final chance to take advantage of your unused ISA and pension allowances. It’s also an opportunity to plan ahead to invest next year’s allowances early, to avoid a last-minute rush and give your money more scope and time to grow inside a tax-friendly shelter.

There might be good reasons to do both. The publication two weeks ago of a new parliamentary briefing paper suggests that a review of pensions tax relief is still on the government’s radar, once it gets a chance to focus on something other than Brexit. Higher earners should consider accelerating pension contributions to take advantage of current rates of relief.

Cautious investors choosing to wait and see how Brexit turns out risk forfeiting this year’s ISA allowance. Bank of England figures suggest that this nervousness has also led to a spike in Cash ISA deposits. Yet, it’s clear that putting money into a Cash ISA doesn’t even ensure better returns than a standard bank account. Savers should consider carefully how to make the most of the long-term tax advantages of their ISA allowance.

Source: Moneyfacts, 29 March 2019

And don’t forget that you can realise gains of up to £11,700 in this tax year without paying Capital Gains Tax. Reinvesting the proceeds into assets held within a pension or ISA wrapper will save you paying tax on any future gains.

In The Picture

Purchasing power parity (PPP) measures the cost of a basket of goods across different countries – and many economists prefer it as a measure of national GDP. In PPP terms, China is already the world’s largest economy – but what might the rise of Asia mean by the year 2030? This graph by Oxford Economics and Brookings takes a look…

The Last Word

“We are leaving the European Union on 29th March, 2019.”

Theresa May, 2017

“We are leaving the EU on 29th March, 2019.”

Theresa May, 2018

“We are leaving the EU on 29th March this year because that’s what Article 50 says, that’s what parliament voted for, and that’s now what British domestic legislation says as well.”

Theresa May, January 2019

The information contained is correct as at the date of the article.

Oaktree Capital Management and BlackRock are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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