Year of the Pig reflections: The impact of Brexit

At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about the economic, political and financial developments that are likely to have an impact on the way institutional investors allocated their portfolios. 

Our latest Year of the Pig reflection weighs in on the issue that continues to dominate the UK's political landscape: its exit from departure from the European Union.

Will Brexit have a major impact on global or Asian markets?

Answer: No

An end, or at least an end to the beginning, is finally in sight for the UK and its haphazard attempt to leave the European Union. The emphatic victory of the Conservative Party in a December general election on essentially a singular pledge to 'Get Brexit Done' means that the UK's last day as a formal member of the EU will be on January 31. 

Of course, none of that was clear a year ago, when Theresa May was the prime minister of a coalition government and Brexit was meant to take place by March 31, 2019. The 12 months since have seen a combination of political incompetence and infighting delay the entire process, which eventually led Boris Johnson to take over as premier.

Johnson had his own initial struggles to push through a Brexit agenda. Briefly, it looked as if opposition parties could combine to collapse the government or force through a second referendum. Instead, it led to a late-year general election that the Conservatives won, in part because of a simple message that appealed to the public's exhaustion with the seemingly neverending Brexit squabble.  

While this very British political drama has been playing out, the rest of the world has largely gone about its business. Financial markets paid little heed – as we predicted. The US economy basically ignored the UK's self-imposed limbo, and while the EU remains economically weak, with moribund growth, Brexit has not left it noticeably worse off than it was before.  

Indeed, far bigger issues to affect financial markets during 2019 included the ongoing US-China trade war, the US Federal Reserve's rate cuts and attempts by various central banks, including the one in Europe, to introduce further levels of stimulus or quantitative easing. This combination helped push most asset prices up during 2019, despite a generally slowdown in the global economy. 

Brexit had little impact in large part because it didn't happen. But 2020 could prove to be a more interesting period. After the UK officially leaves the EU on January 31 the Johnson government has a self-imposed deadline of December 31 to negotiate a withdrawal agreement during a transition period. Fail to do so, and there will be a disorderly no-deal withdrawal, with punishing consequences for the UK's economy (and some damage to the EU too).

While the UK struggles to re-stitch together a looser relationship with the EU, it's likely that investors will mainly keep an eye out to check whether the process offers some sneaky investment opportunities.  

Previous Year of the Pig reflection articles: 

Will the US economy suffer a major downturn? 

Will ETF Connect between China and Hong Kong finally open?

How much will Asian asset owners add to alternatives?

Have asset owners set realistic investment targets for 2019?

Will asset owners treat ESG as more than a box-ticking exercise?