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I believe that any deal on post-Brexit trade would allow UK risk assets to outperform given reduced uncertainty, the prospect of a rapid recovery in the first half of 2021 and attractive valuations. However, the deal would not resolve all the issues facing the UK.

What a Brexit deal won’t do

Under the terms of the deal being discussed at the time of writing, EU-UK trade would be on much less favourable terms than currently. The deal will probably exempt trade in goods from tariffs, which is positive; but it will not prevent non-tariff barriers or provide a framework for services exports. While there may be some regulatory alignment, the deal could allow the UK to deviate in the future, which could trigger retaliatory moves and jeopardise the whole framework. These factors point to further…

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

While the UK equity market appears attractively valued and has the potential for a rebound, I remain neutral on UK equities for now as I believe the uncertain political outlook provides a poor basis for active risk taking. In essence, the outcome of the Brexit negotiations is hard to judge, and a non-cooperative outcome could prove highly disruptive for the UK economy and equities. In my view, this risk is not priced into the market at present.

The UK has had a poor COVID crisis

The UK’s health and economic outcomes have been in line with the worst in Europe, and managing this twin crisis will remain problematic in the near term. At the same time, the UK faces longer-term challenges, such as changes in the migration framework, a sharp rise in minimum wages and the perennial issues of low productivity growth and a large current-account deficit. Together, these near-term and structural challenges create a…

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MARKETS

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

Most of our inflation gauges suggest the figure is likely to fall towards zero in the next 6 – 12 months. But I think the ingredients are coming together to make higher global inflation (>3%) in the next 3 – 10 years more likely. I also expect the UK to be a bellwether for the higher longer-term inflation to come, given its recent history and the UK’s unique characteristics.

Six reasons why inflation should be higher in the next 3 – 10 years

I think there will be a series of negative supply shocks as there is likely to be:

  1. Less imported deflation due to stalling global trade and a larger services proportion of CPI baskets.
  2. A greater emphasis on local rather than global resources because supply chains will increasingly become localised and the government’s objective will be to protect national labour markets.
  3. Continued low productivity as governments will likely become more active at directing resources within economies and protecting…
MACRO
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John Butler
John Butler
Macro Strategist
London

Bottom line: recovery at risk

The COVID-19 crisis has eliminated the brief window for the UK government to provide macro policy clarity and constructively move the Brexit debate forward. I fear that elevated political and economic uncertainty could delay the recovery from the crisis. These longer-term risks are not a market focus currently, but will come to the fore in the recovery.

Lockdown may last longer than in Europe

The UK health crisis is evolving broadly in line with the worst outcomes in Europe but the UK might be a week or two behind. With the Prime Minister recovering from the virus, the government has yet to set out a path to reopening the economy, as at the time of writing. The UK may follow most other European countries with a very gradual opening, but the risk is…

CORONAVIRUS
MACRO

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London
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