Progress

8 December 2017

The week began with a homemade Brexit debacle and ended with what many commentators saw as real progress towards a constructive future relationship building between the exiting UK and the EU. Despite the Northern Ireland hiccup, we had sensed that, following last week’s exit bill compromise, there was a breakthrough in the air. I personally couldn’t believe Northern Ireland’s luck of being offered the tremendous business opportunity of being allowed to remain member of both the UK and the EU. I was already envisaging Belfast becoming a weightier European financial hub than Dublin! Alas, smaller minded nationalist interests prevailed and put an end to that pipe dream.

In the end, not much appeared to have changed between Monday and Friday, except that it was more explicitly phrased that, in case the UK exits the EU without a comprehensive free-trade agreement, then NI would be permitted to continue to trade with the Republic of Ireland as if it was still part of the EU. The point I am not quite sure how to interpret is that the UK government stated that, in that case all, the entire UK will seemingly be under EU rules, in order for NI not to feel cut-off from mainland UK. Does this mean that, as long as the EU refuses to grant the UK a free trade agreement, then the UK will only ever be able to leave in form, but never in substance?

Whichever way it develops from here, this path towards Brexit looks increasingly like a long drawn out softly, softly framework of a new form of associate EU membership. The UK would continue to be broadly a member of the EU’s free trade zone, but operating under an arrangement which allows more exceptions from EU integration than before, at the price of less influence and a lower share of EU common policy benefits.

Without a doubt, a far cry from what 12 months ago Brexiteers were hoping Brexit would bestow on the UK, and what Remainers warned would destroy the UK’s prosperity and fabric of society. While I suspect neither side to be particularly happy at the end of this week, it feels as if the compromise formula we seem to be heading towards is more representative of the 52/48 referendum outcome we actually had, than the 70/30 distribution of Brexit interests we seemed to have under the ‘Brexit means Brexit’ mantra at the beginning of the year. Fingers crossed that the constructive spirit suddenly coming from the negotiating tables will carry over into the coming trade negotiations.

Those who were nervous that the turn of events might lead to a sudden and significant rally in £‑Sterling, which could send the UK stock market into freefall (reversal of last year’s dynamic), were quickly relieved. The relatively insignificant currency movement at the end of the week, confirms what we had suggested all along: Markets had never believed in a hard Brexit in the first place and the previous fall in the currency merely priced in a less favourable trading position for the UK. Unfortunately, this also tells us that a deterioration from the new Brexit prospect could lead to far bigger capital market disruptions than may have been anticipated. No wonder leaders on both sides were keen to find a compromise for the sake of ongoing economic prosperity, rather than continue to placate emotionally charged electorates on either side.

Had it not been for the Brexit drama, our focus would have been on the rotation from growth to value stocks we first wrote about last week, the US tax reform progress and the further acceleration of the Bitcoin mania. These developments are more likely to affect private investors in the near term than the direction of the Brexit negotiations.

On the style rotation side, it first seemed as if it was taking hold, only to unravel later in the week as realisation set in that the fiscal stimulus potential of Trump’s tax reform may be less than anticipated. Furthermore, the prospect of the Russian influence investigation under special investigator Mueller getting ever closer to Trump himself raised the possibility of a further reduction in the Trump administration’s ability to bring about any further structural change, or even for the US to suffer a bout of loss of political leadership.

The Bitcoin mania will feel familiar to all those who can remember the Dotcom bubble times of 1999/2000. As we wrote last week, the main danger from the inevitable bubble implosion is that the resulting redistribution of capital between winners and losers can lead to real liquidity stress amongst late party joiners who, in terms of sheer numbers and vulnerability, may be far more substantial than the few who benefit through a lucky timely exit. We therefore welcome the widespread public warnings and contribute ourselves this week with an insight article into the subject matter, for all those who still feel tempted to join the Bitcoin roller-coaster.

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