Brexit and the impacts of lockdown on equity investing

The ophthalmological term “2020 vision” historically implied near perfect acuity.  A global pandemic blindsided all economic forecasters’ views on the year.  Peering into the mist ahead for the UK in 2021 poses something of a challenge, while so much uncertainty remains from COVID-19 and from the potential sty of unfavourable trade relations with the EU.

Impacts of the COVID-19 lockdown & Brexit

Measures to support the UK economy through this time from both the Government and the Bank of England have been substantial and look set to continue until vaccination programmes allow lock downs to end. Monetary support is expected to continue in the form of quantitative easing and ultra-low interest rates. A “no deal” with the EU would probably lead to increased quantitative easing with negative interest rates likely being unpalatable.

On the fiscal front, the ‘Furlough’ scheme has been extended into March 2021. Direct spending to tackle the virus and support jobs and businesses during 2020 is expected to have cost in the region of £280bn, 13% of GDP.

A new infrastructure plan spending £100bn over the next five years has been announced.  Again, should we see the UK leave the EU transition period with no deal, this will likely lead to further expansionary spending and efforts to lift business confidence. A no deal outcome could result in concerns over the level of Government debt. But with interest rates so low, especially in comparison to history, even this seems manageable.

In summary:

• While the UK has recently highlighted the emergence of a new, potentially more infective, variant of COVID-19, the reality is that this mutation is already prevalent in much of the rest of the world.  The new variant may indeed be more infective or the increase in the rate of transmission may have occurred due to an increase in social interaction at the beginning of the festive season. Public Health England have said that so far there is no evidence that the new variant is more likely to cause severe disease or mortality.

The WHO think it likely that the existing Covid-19 vaccines will be found to work against the new strain. If not, it ought to be straightforward to modify the mRNA sequence used in the Pfizer/BioNtech and Moderna vaccines.

• As this piece is written, no deal on the UK’s continuing trading relationship with the EU has been reached. Our expectation is that concessions will be made on matters of economic insignificance such as fishing rights by the UK in order to try and secure a virtually free trade agreement.
• Both monetary and fiscal policy will provide support to the economy throughout the difficult COVID-19 lock-down winter ahead and may also provide some cushion against unfavourable Brexit terms.

Equity investors tend to dislike uncertainty. Investing in an uncertain environment is uncomfortable. Once details of a trade deal are finalised it seems likely that companies in the UK will experience renewed scrutiny from international investors.

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