In the first of two pieces assessing the state of play for the asset management industry two years after UK’s momentous decision to leave the European Union on 23 June 2016, economists in the funds sector describe what has been achieved so far in negotiations between the UK and the EU and what needs to be addressed in the coming months.
Schroders’ senior European economist Azad Zangana says that the big issues over the future relationship with the UK’s biggest trading partner have not been addressed.
For example, he says, the questions over whether the UK will remain in the EU’s customs union, or will remain member of the single market remain unanswered.
“The only near certainty the government can provide is that in 281 days the UK will cease to be a full member of the EU on March 29, 2019,” he says.
“Some progress was made at the end of 2017, with an agreement on the rights of individuals, and on the Brexit divorce bill. However, progress on trade and other areas of co-operation have stalled due to the Irish conundrum: how to re-introduce borders and keep the Irish peace deal alive?
“This remains a major obstacle to progressing talks, but a more fundamental problem has been the lack of clarity from the UK government on what it wants. Clearly, "Brexit means Brexit”, and “no deal is better than a bad deal”, but these are nothing more than sound bites.
“The government is divided on how best to proceed with regards to major issues such as the customs union and trade.
“Meanwhile hard-line Brexit supporters are pushing for a quick exit with little ties, while more moderate members and those that campaigned against Brexit support ongoing collaboration.
“The latter object to a “hard-Brexit”, but are willing to give prime minister Theresa May a chance to deliver on her promises of a Brexit that satisfies everyone, regardless of whether this is realistic.
“Time is running out. Recent reports of deadlock suggest that a Brexit deal may not be in place for the October European summit, and that it may take a few more months. This leaves little time for parliaments to ratify the deal domestically so that Brexit can proceed in March 2019.
“The complex nature of negotiations, the divisions in the government and opposition in parliament all highlight the immensely difficult and potentially impossible task the prime minster faces in keeping all sides happy.
“This was made crucial following her decision to call a general election in 2017, which resulted in her losing the government’s majority. Her precarious position greatly increases the chances of a collapse in her government, and potentially a “hard-Brexit”.
Meanwhile Mark Phelps, chief investment officer at AllianceBernstein believes that with just 12 months to go until Britain officially leaves the European Union, the clear path to an orderly Brexit remains “thoroughly obscured by fog”.
“The transition deal which requires Britain to abide by existing EU rules, but losing any say in the EU’s decision making, only highlights a lack of real progress so far,” he says.
“Businesses and investors relying on long-term outlooks are none the wiser about what type of deal might lie ahead and how it will affect them.
“It currently appears inevitable that the UK will leave the European single market and, almost certainly, the customs union. Since this will have a significant impact on doing business, all diplomatic efforts will now be focused on minimising these effects.
“So far the picture for the UK economy and businesses has been murky. Many UK exporters have seen a pick-up in orders following sterling’s weakness in 2016, but this benefit is dissipating.
“In financial services, we have also seen investment at the margin moving towards, Dublin, Luxembourg and Frankfurt, although the numbers are not yet that large. It seems that most businesses are not showing their cards while hoping for the best and planning for the worst.”
Philippe Waechter, chief economist at Ostrum Asset Management, says that the most striking impact of Brexit has been the lower growth momentum seen in the UK since the referendum.
“The dynamics have faltered and the UK has not taken advantage of the strong growth improvement of the euro area in 2017,” he says.
“The UK is disconnected from the rest of Europe while the euro area is its main trade partner. In other words, despite the European recovery there was no positive contagion in the UK.
“Expectations about the UK have dramatically changed and the domestic market is not strong enough to drive a strong growth trajectory.
“The uncertainty will remain, implying less capital inflows, people outflows leading to lower human capital and lower capital expenditures. The adjustment process is just at its beginning.
“The main effort is to reduce uncertainty for everyone, from households to companies and foreign investors.
“That would be key for a recovery. But the current negotiation with the European Commission and the weakness of Theresa May and her parliament do not remove the risk of a hard Brexit and a situation that would have a persistent negative impact on the UK economy.”
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