LONDON (Reuters) – Britain’s trade deal with the European Union removes 4-1 / 2 year old fear of collapsing out of bloc without trade deals in place, but markets will take years British financiers to lose their scars caused by Brexit.
The risk of a ‘no-deal Brexit’ has weighed on Britain’s growth and investment prospects since June 2016, when citizens voted to sever ties with the country’s largest financial services client, which represents $ 1 trillion in bilateral trade per year.
Thursday’s deal, seven days before the deadline, is therefore an undeniable relief. Analysts urge clients to grab undervalued UK stocks, the worst performance of any major market since 2016, and many say they’ve bought sterling, which sits near 2-1 / 2 year highs in the past. over $ 1.36.
But those who hope the deal will allow UK assets to catch up with high-flying overseas markets might be disappointed.
The stripped-down nature of the deal leaves Britain much more detached from the EU than thought likely in 2016. New negotiations are inevitable in 2021 to flesh out the deal.
All of this means that the haircut that has weighed on UK assets since 2016 is not going away anytime soon.
“Brexit means the UK will likely lose some of its shine,” said Seema Shah, chief strategist at Principal Global Investors.
While the news may lend some traction to UK markets, it would not protect the economy from long-term scarring inflicted by a combination of Brexit and COVID-19, she said.
“Being excluded from the world’s largest single market area will see jobs, people and capital flows draining from the UK, in search of destinations that instead embrace globalization,” Shah added.
To illustrate the haircut, UK stocks have underperformed since 2016 and have lagged behind the global recovery since March, which has propelled rival indexes to record highs.
The British currency remains around 20% below its long-term fair value. Few of them expect full recovery in the short term.
The underperformance is largely due to the dumping of UK assets by foreign investors. Financial data provider eVestment estimates that European and American investors made more money than they added in UK stocks almost every quarter between the referendum and the third quarter of 2020.
And as the size of the UK market has shrunk as a percentage of the world index, to 4% from 10% before the referendum, foreign investors no longer need to own so many UK stocks, said Caroline Simmons, CIO, UK, at UBS. World Heritage Management,
UK stocks may perform well in an environment where other markets seem expensive – Simmons says UK stocks are trading at a 30% discount to global markets against a typical 10% discount.
But she doesn’t expect them to fully recover.
“As for the Brexit discount, I think part of it will disappear but will it completely disappear? The weight of the UK’s cumulative GDP following Brexit is still considerable, ”she said.
BREXIT COVID-19 COMPOUNDS
As a further shadow on the outlook, the UK economy, already weakened by Brexit uncertainty, has suffered the worst damage of any major country in the COVID-19 pandemic, with the second quarter of 2020 experiencing the worst recession in 300 years.
This forced the government to take its borrowing to a peacetime record.
The economic recovery is complicated by the weakness of “physical” foreign direct investment. The net worth of foreign direct investment (FDI) in the UK fell to £ 49.3 billion in 2018, a quarter of 2016 levels, according to official data.
This year will have seen 30 to 45% fewer FDI projects than 2019, according to EY estimates, mainly due to the pandemic.
Hinesh Patel, portfolio manager at Quilter Investors, said the Brexit deal “could clear the backlog of international investments that was waiting for some sort of result before institutions resume investing in UK plc”.
Others are less optimistic and claim that the watered-down relationship with Brussels will inflict lasting damage.
“There’s a bit of short-term versus long-term history here,” Andrew Sheets, Morgan Stanley’s head of multi-asset strategy, said before the deal was announced.
Removing the risk of no-deal will increase average asset prices, Sheets said, but said, “It doesn’t solve the underlying economic challenges … You are facing a negative shock on the services that are a problem. vast majority of the UK economy.
Additional reports by Thyagaraju Adinarayan; edited by Sujata Rao and Barbara Lewis