It all started three years ago when the Brits unexpectedly voted to leave the EU bloc. The following day, on June 24, 2016, the value of the pound plunged by seven per cent. Three years on, the pound is once again tumbling, recently reaching a two-year low. 

Since April, the value of the sterling has decreased by five per cent against the dollar (declining by one per cent in the past month), a negative milestone in terms of performance by any one of the major currencies. This was caused by the prolonged Brexit deal. 

Sterling has been weaker since the referendum because the pros­pect of Brexit has led economists to cut their growth forecasts. These stats reached their lowest point in October 2016 as Theresa May had initially pro­mised a hard Brexit. Despite this, the value of the sterling partially recovered its loss in value over the following two years. 

However, the threat of a no-deal Brexit is back. The ex-prime minister eventually tried her best to rule out the possibility of Britain exiting the EU with a hard or no-deal but her successor, Boris Johnson, has put this idea back on the table. On the other hand if Jeremy Hunt had been elected prime minister, there would have probably been a brief pound rally as he was seen as more likely to avoid a no-deal Brexit. Still, he would have faced all the same problems as May in getting the Brexit deal through Parliament.

“Trying to get something through that suits a disparate number of parties and groups in Parliament – that seems to still be an unachievable task; hence why I think sterling has been weakening,” said Leigh Hims­worth, a stock fund manager at Fidelity International.

The question on every economist’s mind was who will lead the UK past the turmoil of a nasty divorce between the UK and the EU. They believe that regardless of who won the UK leadership, the markets will lose. They believe that a messy divorce from the EU will result to a thumping of the country’s assets. This is a scenario neither candidate can avoid.

Boris Johnson has just about three months to try and secure a Brexit deal from Brussels and get it through parliament. It is highly unlikely that during this period investors will get any new information, and to top it all, in a few days’ time, parliament will enter recess until September.

“Markets will remain fixated on the Brexit process above all else,” said Edward Park, deputy CIO at Brooks Macdonald Asset Management. “UK corporate earnings, economic fundamentals and business sentiment all play second fiddle.”

A divorce of a more than 40-year-old marriage filled with economic and legal integration will not be easy. The absence of a nego­tiated deal means that a num­ber of rules, permits, agreements and engagements will be dismantled. The UK will have to start trading under the World Trade Organisation import-export tariffs and become subject to border checks.

Another repercussion will be the sharing of data between the two parties involved. This is primarily based on the General Data Protection Regulation that came into effect in May of last year. This affected all companies that gather EU citizens’ data, operating in the EU.  Hefty fines will be imposed on  businesses that do not comply with these rules.

Since the UK was part of the EU when GDPR was introduced, its firms now operate under its rules. The UK argues this should qualify it for an ‘adequacy’ badge after Brexit. Given that the UK has been hit by a number of national security matters in the past, the best example of data sharing should be given in such circumstances – if the UK intelligence services demand access to an EU citizen’s personal data, such as encrypted chat messages or payments, and the provider hands over the data, the citizen has the right to complain to a European regulator. The arraigned can take the case to court and has a good chance of being released due to violation of human rights.

Investors should communicate with their investment advisor to try to invest in other securities that do not have a sole exposure in the UK

Subsequently the provider could then be fined by the EU. Needless to say, this could prompt all companies that have been cooperating with the UK to stop transferring data without clear approval from the EU. This can also be the case for money laundering and other financial crimes.

Statistics published last month showed that UK GDP had fallen in April by around 0.4 per cent. Other survey data suggest that Britain registered no economic growth in the second quarter of the year.

This data amalgamated with other data releases shows that measures of domestically genera­ted inflation are low, which makes it less likely that the Bank of England will raise interest rates. Bank of England Governor Mark Carney has said a no-deal Brexit could, in the worst case, shrink the UK’s gross domestic product by eight per cent within a year.

According to data gathered by the Financial Times, Brexit drained more than £30 billion in just over a year, and according to Standard & Poor’s, Britain missed out on £550 million per week of growth since June 2016’s referendum, while costing the British economy £66 billion in just under three years.

All these factors amalgamated with the uncertainty of what’s to come out of the Brexit deal, does not leave the investor with a peaceful mind. They will be prompted to snub UK assets and shift money to EU regulated products. 

“As we get closer to the deadline, pressure on UK assets could in­crease where sterling could continue to underperform and gilts rally if we get no clarity,” said Mo­hammed Kazmi, a portfolio manager at Union Bancaire Privée SA.

At this point in time, investors should communicate with their investment advisor to try to invest in other securities that do not have a sole exposure in the UK. Collective investment schemes could be an ideal option as the underlying assets will be geographically diversified – meaning the investor would be exposed to different countries, thus reducing the geographical, country as well as the political risks.

This article was prepared by Matthew Miceli Donnelly, ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), investment advisor at Jesmond Mizzi Financial Advisors Ltd. The article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment ser­vices by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on 2122 4410, or e-mail matthew.micelidonnelly @jesmondmizzi.com. 

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