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Progress?

25 February 2019

We prognosticated in January that we thought it likely that the impossible US President Trump would reach a trade deal with China before the hapless UK prime minister would achieve a constructive divorce settlement with the EU. This week both issues appeared to progress as predicted. Judging by the US president’s relentless tweets about imminent negotiation success with the Chinese, not only will the threatened trade tariffs not come into force on 1 March, but there may quite likely be some form of trade deal in the not so distant future.

Unfortunately, it also seemed that our expectation that 29 March would not after all mark the UK’s formal exit from the EU is becoming probable reality. While there were persistent rumours from government ministers that a break-through on the Irish back-stop was imminent, there were equally persistent rumours from the EU side that the negotiations will go into ‘overtime’. With the UK government’s inability to gain parliamentary support it was seen as being forced to ask for an Article 50 extension of at least three months. Much reported change dynamics in Parliament also suggested that the May government would have no choice but to abandon any idea of using the threat of a no-deal Brexit to blackmail MPs or the EU into concessions.

Capital markets greeted the improving US-China trade settlement prospect with further stock market advancement, while the likely UK Brexit stalemate extension was either shrugged off or even judged positively, insofar as a light rise in £-Sterling versus the €-Euro can be interpreted as such.

What insight into the likely future short-term path of investment return, if any, can we draw from the latest political developments and market action? The global recovery in stock markets has progressed to the extent where most of our investment portfolio strategies have very nearly recovered their loses of 2018, with some slightly in positive return territory and others slightly in negative. This means that markets no longer discount a significant fall in 2019 economic activity, despite all ongoing economic indicators confirming that the global economy is indeed slowing down, even if not outright contracting. As has been the case before in this prolonged cycle, risk asset investors appear to be willing to look further ahead – having mistaken a liquidity driven market correction as a harbinger of recession.

As far as the political side is concerned, a US-Sino trade settlement would introduce considerable upside into 2019 growth prospects, while the Brexit deadline extension is pointing towards the possibility of a softer divorce settlement than originally envisaged by the government. As we have stated before, this is likely to be positive for the UK economy, but whether British society will be able to return to political stability under such a scenario is currently questionable. From this end the formation of a new political movement in Parliament opens an interesting perspective in an environment where, according to surveys, an increasing proportion of the electorate is deeply dissatisfied with the political party options currently available to them.

In conclusion, we see an ever-increasing probability of 29 March 2019 not marking the end of Brexit uncertainty. Instead we see – as a result – pressure on the whole political establishment rising to levels which could quite possibly become the catalyst for seminal change to the UK’s political landscape. In the meantime, the economy will plod on, even if held back by uncertainty and the extra cost burden of much redundant preparation for events which may never happen.